2/3/17: Real & Nominal GDP

• Nominal GDP
• The value of output produced in current prices.
• Can increase from year to year if either output or prices increase.
• P x Q (Price x Quantity)
• Real GDP
• Value of output produced in constant base year prices.
• Adjusted for inflation
• Can increase from year to year only if output increases
• P x Q (Price x Quantity of Base Year)

• Only in base year is Real GDP = to Nominal GDP
• In years after base year, Nominal GDP > Real GDP
• In years before base year, Real GDP > Nominal GDP

• GDP Deflator
• Price index used to adjust from Nominal to Real GDP
• Nominal GDP / Real GDP x 100
• CPI (Consumer Price Index)
• Measures inflation by taking changes in the price of a market basket of goods.
• Price of Market in Current Year / Price of Market in Base Year x 100