# 6.2 Adjusting nominal values to real values  (Page 3/9)

 Page 3 / 9

[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.

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:

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:

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%

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%

give basic idea about India's national income
what are the sources of recessions and booms
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?
It saves time its creates more employment
Scarcity means human wants exceeds the resources needed to satisfy them 1. Limited resources 2. Numerous human wants
Gold
Scarcity means shortage!!!
Lewis
Gold you're knowlwgist bro keep going lion
Moha
hmm am fresh here oh
Andy
Being newest means u have it all!!!
Lewis
where you from university of malakand.or where are you.
Naeemuddin
What is mean by small open economy ?
Gecho
1. there is specialization of labor 2. skilled labor 3. increase in productivity
1 to make right choices 2. to handle scarcity 3. make informed decisions
Amma
what is the difference between demand and quantity demanded?
Demand is affected by other factors while price is held constant Quantity demanded is affected by price while other factors are held constant
Gold
how can I ask the question here . tell me anyone plz I'm new user so kindly help here I will click ......?..🤗
ISRAR
me . I'm *
ISRAR
So kindly help me. where I will click......***
ISRAR
What are the reasons of demand pull inflation
the reasons behind pull inflation are high rate of interest
Ahmed
yes
M-H-S
in other hand when demand of specific commodity is high and its supply is low there will be inflation of price
Ahmed
Thank you
GIRIDHARI
you are welcome
Ahmed
thank you
Mohamed
some hot stuff from Ahmed
JOSHUA
what is barter system
a system in which goods are exchanged for other goods
daniel
Barter system is said to be the process whereby goods are being exchange for goods
Asamoah
a system in which money have not play any role
Ramu
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 😁
jax
ok.thank u
twinkel
thanks a lot to everyone .
ISRAR
bater system is a system of trade where by goods are exchange for goods which exist before existence of what we call money
What is fiscal policy and intrest rates
fiscal policy is the use of govt. revenue collection and expenditure to influence the economy.
twinkel
it is government spending, taxing, regulatory, borrowing powers on the economy.
JOSHUA
income and expenditure
Income is revenue generated from a business while expenditure is money spent
Gold
For short income is gain while expenditure is loss.
Lewis
what is the difference b/w income per capita and income
Moha
What is aggregate
Patrice
aggregate means total
konglan
Macro economics : it is the study of all aggregate of all economic activities of an economic as whole.
what is macro economics
it is study of all aggregate of all economic activities of an economic as whole.
Rajat
Macro economics is the aggregate study of national income, investment, price level, changes in economic activities, GDP and economic inflation.
Zahid
hey
Ahmed
how are you
Ahmed
thanks
Ahmed
i am find
Ahmed
Ahmed
am good bro
Ahmed
am fine
Ahmed
what is comparative and superlative advantage? give an example