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By the end of this section, you will be able to:

  • Contrast nominal GDP and real GDP
  • Explain GDP deflator
  • Calculate real GDP based on nominal GDP values

When examining economic statistics, there is a crucial distinction worth emphasizing. The distinction is between nominal and real measurements, which refer to whether or not inflation has distorted a given statistic. Looking at economic statistics without considering inflation is like looking through a pair of binoculars and trying to guess how close something is: unless you know how strong the lenses are, you cannot guess the distance very accurately. Similarly, if you do not know the rate of inflation, it is difficult to figure out if a rise in GDP is due mainly to a rise in the overall level of prices or to a rise in quantities of goods produced. The nominal value    of any economic statistic means the statistic is measured in terms of actual prices that exist at the time. The real value    refers to the same statistic after it has been adjusted for inflation. Generally, it is the real value that is more important.

Converting nominal to real gdp

[link] shows U.S. GDP at five-year intervals since 1960 in nominal dollars; that is, GDP measured using the actual market prices prevailing in each stated year. This data is also reflected in the graph shown in [link]

(Source: www.bea.gov)
U.s. nominal gdp and the gdp deflator
Year Nominal GDP (billions of dollars) GDP Deflator (2005 = 100)
1960 543.3 19.0
1965 743.7 20.3
1970 1,075.9 24.8
1975 1,688.9 34.1
1980 2,862.5 48.3
1985 4,346.7 62.3
1990 5,979.6 72.7
1995 7,664.0 81.7
2000 10,289.7 89.0
2005 13,095.4 100.0
2010 14,958.3 110.0

U.s. nominal gdp, 1960–2010

The graph shows that nominal GDP has risen substantially since 1960 to a high of $14,527 in 2010
Nominal GDP values have risen exponentially from 1960 through 2010, according to the BEA.

If an unwary analyst compared nominal GDP in 1960 to nominal GDP in 2010, it might appear that national output had risen by a factor of twenty-seven over this time (that is, GDP of $14,958 billion in 2010 divided by GDP of $543 billion in 1960). This conclusion would be highly misleading. Recall that nominal GDP is defined as the quantity of every good or service produced multiplied by the price at which it was sold, summed up for all goods and services. In order to see how much production has actually increased, we need to extract the effects of higher prices on nominal GDP. This can be easily done, using the GDP deflator.

GDP deflator is a price index measuring the average prices of all goods and services included in the economy. We explore price indices in detail and how they are computed in Inflation , but this definition will do in the context of this chapter. The data for the GDP deflator are given in [link] and shown graphically in [link] .

U.s. gdp deflator, 1960–2010

The graph shows that the U.S. GDP deflator has risen substantially since 1960.
Much like nominal GDP, the GDP deflator has risen exponentially from 1960 through 2010. (Source: BEA)

[link] shows that the price level has risen dramatically since 1960. The price level in 2010 was almost six times higher than in 1960 (the deflator for 2010 was 110 versus a level of 19 in 1960). Clearly, much of the apparent growth in nominal GDP was due to inflation, not an actual change in the quantity of goods and services produced, in other words, not in real GDP. Recall that nominal GDP can rise for two reasons: an increase in output, and/or an increase in prices. What is needed is to extract the increase in prices from nominal GDP so as to measure only changes in output. After all, the dollars used to measure nominal GDP in 1960 are worth more than the inflated dollars of 1990—and the price index tells exactly how much more. This adjustment is easy to do if you understand that nominal measurements are in value terms, where

Questions & Answers

what is Marginal analysis in Economics can sameone explain to me pliss
Gary Reply
facts and proof
Jibril
what matters in comsumption
Jibril
money speaks sales
Jibril
if marginal utility is coins then it analysis is choice of preference
Jibril
facts
Skills
what is money
Emmanuel Reply
hy
Usama
Money refers to the exchange value of goods and services.
Mbye
can you more explain it?
Usama
money is defined as any legal tender use in the exchange of goods and services.
Emmanuel
we can say commodity. A tool of change..
Baki
Money is a tool which is use to fullfil our needs and desires in the shape of goods and services.
Usama
good definition.
Baki
how does indirect tax increase the total expenditure?
Madishez
Money is any things which generally accepted as a medium of exchange by the general pubblic.
shakeel
indirect tax also the part of indirect expense. when tax occure then expenses increase
Usama
I can't understand this type becousr it's difficult for me that's why could you help me
Sheikh Reply
how will demand question will be like in an examination
ekua Reply
demand supply cycle
Omkar
like questions
Omkar
or different types of demand
Omkar
based on societal class structure
Omkar
or the most common and basic demands
Omkar
Give a simple explantion of the LAW OF DEMAND?
IT Reply
the law of demand says that all things been equal the higher the price the lower the quantity is demanded vise versa
Mensah
As price the increases the demand decrease
Gary
Income elasticity of demand
Shaan Reply
income elasticity of demand
Adjei
what
Omkar
what is labour force
ademu Reply
Labour force is the number of people who are actively and presently working in a country to increase the availability of goods and services.
Mbye
It refers to the active population available for work at a going rate.
Daniel
labour force is the number of people who are active and present working in a country to increase the availability of goods and services
Deborah
The law of diminishing returns States that "all other things being equal as more and more of a variable factor(labour) is employed on a fixed factor (Land) ,marginal product initially increases reaches a maximum and there after diminishes or fall
samuel Reply
how does exceptional demand occur
Esther Reply
It occurs, due to certain reasons, but to make my answers brief. Exceptional demand occurs when our earnings change. As the law of demand says the higher the price the lower the demand. However no matter how high the price is the person will still purchase the good due to his level of income.
Mbye
opportunity cost definitions
Surur
What do you mean mean by opportunity cost definition?
Mbye
OK thanks for the answer
Esther
Opportunity cost, means, in order to get something, you sacrifice something
Taha
Opportunity cost simply means, sacrificing one commodity at the expense of another.
Mbye
A production manager should continue to use inputs until the Marginal Product (MP) reaches at zero. Justify this statement.
Newtan
What is the scale of preference
Mbye
Esther👌
TSEKO
The law of diminishing returns
Mbye
Apply, PoE, Process of elimination, the 1st stage of production is not correct for the producer to produce because he has the option to increase his production level, so, eliminate that. In third stage, its not rational to produce because, Total output declines. Hence, it is only in the second
Taha
Stage, that the producer produces, also because, it is at this stage that the total output is maximum.
Taha
Hence proved
Taha
A production manager should continue to use inputs until the Marginal Product (MP) reaches at zero. Justify this statement.
Newtan
plz help
Newtan
thanks
Surur
deference b/n aggregate demand and aggregate supply
Surur
ok a production manager should continue to use it inputs until MP reaches zero because at that stage it is called rational stage. And at this stage when a producer produce anything he/she will get more output, aside that too the Total product (TP) will also be at it maximum.
samuel
Exceptional demand occurs due to demand conditions, and when it does not obey the law of demand.
samuel
e
mukul
A production manager should continue to use inputs until the Marginal Product (MP) reaches at zero. Justify this statement.
Newtan Reply
anyone help me Please
Newtan
does the richest experience scarcity?
elan Reply
how do you master a subject
elan
Yes, this is due to the fact that human wants are unlimited in number how ever he has everything his heart desires, he still have dreams of owning/having something else of a great value.
Tusajigwe
that's true,thank you tusajigwe
elan
why firm maximize profits when MC=MR
Abel Reply
The night before an economic exam you decide to go for outing instead of staying at home and studying for your exam.you get 50 percent on your exam as compared with the 70 percent that you normally score.
Muhammad Reply
join me
Abel
why do banks charge fees and charges?
Shirley Reply
What is Labour
Angela Reply
the service provide by the labourer is termed as labour.
Prtj

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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