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[link] shows the U.S. nominal and real GDP since 1960. Because 2005 is the base year, the nominal and real values are exactly the same in that year. However, over time, the rise in nominal GDP looks much larger than the rise in real GDP (that is, the nominal GDP line rises more steeply than the real GDP line), because the rise in nominal GDP is exaggerated by the presence of inflation, especially in the 1970s.

U.s. nominal and real gdp, 1960–2012

The graph shows the relationship between real GDP and nominal GDP. After 2005, nominal GDP appears lower than real GDP because dollars are now worth less than they were in 2005.
The red line measures U.S. GDP in nominal dollars. The black line measures U.S. GDP in real dollars, where all dollar values have been converted to 2005 dollars. Since real GDP is expressed in 2005 dollars, the two lines cross in 2005. However, real GDP will appear higher than nominal GDP in the years before 2005, because dollars were worth less in 2005 than in previous years. Conversely, real GDP will appear lower in the years after 2005, because dollars were worth more in 2005 than in later years.

Let’s return to the question posed originally: How much did GDP increase in real terms? What was the rate of growth of real GDP from 1960 to 2010? To find the real growth rate, we apply the formula for percentage change:

2010 real GDP – 1960 real GDP 1960 real GDP  × 100  =  % change 13,598.5 – 2,859.5 2,859.5  × 100  =  376%

In other words, the U.S. economy has increased real production of goods and services by nearly a factor of four since 1960. Of course, that understates the material improvement since it fails to capture improvements in the quality of products and the invention of new products.

There is a quicker way to answer this question approximately, using another math trick. Because:

Nominal  =  Price × Quantity % change in Nominal  =  % change in Price + % change in Quantity  OR  % change in Quantity  =  % change in Nominal – % change in Price

Therefore, the growth rate of real GDP (% change in quantity) equals the growth rate in nominal GDP (% change in value) minus the inflation rate (% change in price).

Note that using this equation provides an approximation for small changes in the levels. For more accurate measures, one should use the first formula shown.

Key concepts and summary

The nominal value of an economic statistic is the commonly announced value. The real value is the value after adjusting for changes in inflation. To convert nominal economic data from several different years into real, inflation-adjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the measurements so that they are measured in the money prevailing in the base year.

Problems

The “prime” interest rate is the rate that banks charge their best customers. Based on the nominal interest rates and inflation rates given in [link] , in which of the years given would it have been best to be a lender? Based on the nominal interest rates and inflation rates given in [link] , in which of the years given would it have been best to be a borrower?

Year Prime Interest Rate Inflation Rate
1970 7.9% 5.7%
1974 10.8% 11.0%
1978 9.1% 7.6%
1981 18.9% 10.3%
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A mortgage loan is a loan that a person makes to purchase a house. [link] provides a list of the mortgage interest rate being charged for several different years and the rate of inflation for each of those years. In which years would it have been better to be a person borrowing money from a bank to buy a home? In which years would it have been better to be a bank lending money?

Year Mortgage Interest Rate Inflation Rate
1984 12.4% 4.3%
1990 10% 5.4%
2001 7.0% 2.8%
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Questions & Answers

what is crowding out effect?
Sera Reply
What to read the introduction
prince Reply
Keynesian theory of employment
sainlangki Reply
it's about use of Fiscal policy.
yvonne
yar what actually means of APc. averge means?. can someone give a best example plz
Asrar Reply
APC is average propensity to consume n this refers to ratio of consumption expenditure to corresponding level of income
Vishakha
then it means both MPC and ApC are same ?
Asrar
which model predicted a global collapse in the world's social and economic system before the year 2010
Francis Reply
trade deficit
Amadou
is trade deficit the correct answer?
Abinash
yes
Amadou
what is the formula of mixed income ?
Sanjum Reply
NDPfc = COE + OS +MI MI=NDPfc- COE- OS
Vishakha
labor force in.Nigeria is seen as .......?
Aisha Reply
Is demand the same as being in need of a product?
Aphiwe Reply
yeah
Demand is defer from only need of products
Zubairu
need is the primary and main root of demand. but demand is the result of combination of need; income capacity and desire to expend of money for that product.
Ramu
products or services
jax
what is price determination?
Alick Reply
why are imports subtructed when GDP is calculated in the expenditure approach
nati
what is fiscalpolicy
nati Reply
The way of the government expenses and other analysis
Zubairu
It explains government spending and how it helps to direct the economy towards the desired direction. For instance, if the govt of a nation is desirous of achieving economic growth and development, then the govt will adopt an expansionary fiscal policy which imply more spending by the govt.
Sunday
and politics party important
mujtaba Reply
politics party important
mujtaba
Which party is that
Zubairu
persons who stopped searching for jobs but would accept if the opportunity presents itself
Torissa Reply
persons who are unemployed whether they are underage, retired or incapacitated
Torissa
the us economy is best characterized as?
Shekeriah
what is the impact of fiscal policy in the short and long run in the AD/AS model...
Hydrammeh Reply
What is demand
Mohd Reply
Demand is the desire for a commodity backed by the willingness and the purchasing power too.
Ajay
what is the impact of the higher tax rate on the business and the economy at large..?
Hydrammeh Reply
aggregate demand decreases and GDP decreases in the long run prices will decrease because aggregate supply will shift to the right and increase
Murabit
Thanks, Murabit
Hydrammeh
But still I will need more explanation
Hydrammeh
no problem tax rate is a form of fiscal policy so any time the government changes spending or taxes it will directly affect the economy
Murabit
but remember that there at different economic views on fiscal policy there is classical,Keynesian and moneterism
Murabit
if taxes increase aggregate demand decreases causing a fall in prices causing a fall in the money demand lowering interest rate and increasing investment spending in turn increasing prices
Murabit
thanks so much Murabit
Hydrammeh

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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