<< Chapter < Page Chapter >> Page >

[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.


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%
Got questions? Get instant answers now!

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%
Got questions? Get instant answers now!

Questions & Answers

give basic idea about India's national income
Maloy Reply
what are the sources of recessions and booms
Zweli Reply
A few years ago, Ama paid $500 to put together a record collection. Today she sold her albums at a garage sale for $100. how does the same affect GDP?
teresa Reply
It saves time its creates more employment
Gold Reply
Scarcity means human wants exceeds the resources needed to satisfy them 1. Limited resources 2. Numerous human wants
Scarcity means shortage!!!
Gold you're knowlwgist bro keep going lion
hmm am fresh here oh
Being newest means u have it all!!!
where you from university of malakand.or where are you.
What is mean by small open economy ?
1. there is specialization of labor 2. skilled labor 3. increase in productivity
Amma Reply
1 to make right choices 2. to handle scarcity 3. make informed decisions
what is the difference between demand and quantity demanded?
Mursal Reply
Demand is affected by other factors while price is held constant Quantity demanded is affected by price while other factors are held constant
discuss advantages and disadvantages of international trade.
Ram Reply
how can I ask the question here . tell me anyone plz I'm new user so kindly help here I will click ......?..🤗
me . I'm *
So kindly help me. where I will click......***
What are the reasons of demand pull inflation
the reasons behind pull inflation are high rate of interest
in other hand when demand of specific commodity is high and its supply is low there will be inflation of price
Thank you
you are welcome
thank you
some hot stuff from Ahmed
what is barter system
twinkel Reply
a system in which goods are exchanged for other goods
Barter system is said to be the process whereby goods are being exchange for goods
a system in which money have not play any role
goods and services are exchanged .. problem is finding equitable or agreeable value for the exchange of the goods or services.. I teach maths privately and love home made cake, I decided 4 home made cakes was worth an hour of private maths 😁
ok.thank u
thanks a lot to everyone .
bater system is a system of trade where by goods are exchange for goods which exist before existence of what we call money
accounts in balance of trade
Kamuyu Reply
What is fiscal policy and intrest rates
Attah Reply
fiscal policy is the use of govt. revenue collection and expenditure to influence the economy.
it is government spending, taxing, regulatory, borrowing powers on the economy.
income and expenditure
Bittu Reply
Income is revenue generated from a business while expenditure is money spent
For short income is gain while expenditure is loss.
what is the difference b/w income per capita and income
What is aggregate
aggregate means total
Macro economics : it is the study of all aggregate of all economic activities of an economic as whole.
Rajat Reply
what is macro economics
Sarah Reply
it is study of all aggregate of all economic activities of an economic as whole.
Macro economics is the aggregate study of national income, investment, price level, changes in economic activities, GDP and economic inflation.
how are you
i am find
what about you
am good bro
am fine
what is comparative and superlative advantage? give an example
Xanaan Reply

Get the best Macroeconomics course in your pocket!

Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Macroeconomics' conversation and receive update notifications?