Real vs Nominal GDP Flashcards

Real versus Nominal GDP

• Inflation can distort economic variables like GDP.
• Therefore, we have two versions of GDP:
  • Nominal GDP
    • Values output using current prices.
    • Not corrected for inflation.
  • Real GDP
    • Values output using the prices of a base year.
    • Corrected for inflation.

Example: Computing Nominal GDP

• The example considers the computation of nominal GDP for three years (2011, 2012, 2013) based on the prices and quantities of two goods: Pizza and Latte.

• Data:

  • 2011:
    • Pizza: Price = $10, Quantity = 400
    • Latte: Price = $2.00, Quantity = 1000
  • 2012:
    • Pizza: Price = $11, Quantity = 500
    • Latte: Price = $2.50, Quantity = 1100
  • 2013:
    • Pizza: Price = $12, Quantity = 600
    • Latte: Price = $3.00, Quantity = 1200

• Calculations:

  • 2011 Nominal GDP:
    • (10 \times 400) + (2 \times 1000) = 4000 + 2000 = $6,000
  • 2012 Nominal GDP:
    • (11 \times 500) + (2.50 \times 1100) = 5500 + 2750 = $8,250
  • 2013 Nominal GDP:
    • (12 \times 600) + (3 \times 1200) = 7200 + 3600 = $10,800

• Percentage Increase:

  • From 2011 to 2012: 37.5%
  • From 2012 to 2013: 30.9%

Example: Computing Real GDP

• Compute real GDP in each year, using 2011 as the base year.

• Data:

  • 2011:
    • Pizza: Price = $10, Quantity = 400
    • Latte: Price = $2.00, Quantity = 1000
  • 2012:
    • Pizza: Price = $11, Quantity = 500
    • Latte: Price = $2.50, Quantity = 1100
  • 2013:
    • Pizza: Price = $12, Quantity = 600
    • Latte: Price = $3.00, Quantity = 1200

• Base Year Prices (2011):

  • Pizza: $10
  • Latte: $2.00

• Calculations:

  • 2011 Real GDP:
    • (10 \times 400) + (2 \times 1000) = 4000 + 2000 = $6,000
  • 2012 Real GDP:
    • (10 \times 500) + (2 \times 1100) = 5000 + 2200 = $7,200
  • 2013 Real GDP:
    • (10 \times 600) + (2 \times 1200) = 6000 + 2400 = $8,400

• Percentage Increase:

  • From 2011 to 2012: 20.0%
  • From 2012 to 2013: 16.7%

Nominal GDP vs Real GDP

• Nominal GDP is measured using the current prices of that year.

• Real GDP is measured using constant prices from the base year (2011 in this example).

• Data:

  • 2011:
    • Nominal GDP: $6000
    • Real GDP: $6000
  • 2012:
    • Nominal GDP: $8250
    • Real GDP: $7200
  • 2013:
    • Nominal GDP: $10,800
    • Real GDP: $8400

Change in Nominal GDP vs Real GDP

• The change in nominal GDP reflects both changes in prices and quantities.

• The change in real GDP reflects the change in GDP if prices were constant (i.e., if there was zero inflation).

• Hence, real GDP is corrected for inflation.

• Data:

  • 2011:
    • Nominal GDP: $6000
    • Real GDP: $6000
  • 2012:
    • Nominal GDP: $8250 (37.5% increase)
    • Real GDP: $7200 (20.0% increase)
  • 2013:
    • Nominal GDP: $10,800 (30.9% increase)
    • Real GDP: $8400 (16.7% increase)

Nominal and Real GDP in the U.S., 1965–2010

• A graph illustrating Nominal and Real GDP in the U.S. from 1965–2010.
• Real GDP is based on the base year 2005.
• Both are measured in billions of dollars.