# 6.2 Adjusting nominal values to real values  (Page 2/9)

 Page 2 / 9

Let’s look at an example at the micro level. Suppose the t-shirt company, Coolshirts, sells 10 t-shirts at a price of $9 each. Then, In other words, when we compute “real” measurements we are trying to get at actual quantities, in this case, 10 t-shirts. With GDP, it is just a tiny bit more complicated. We start with the same formula as above: For reasons that will be explained in more detail below, mathematically, a price index is a two-digit decimal number like 1.00 or 0.85 or 1.25. Because some people have trouble working with decimals, when the price index is published, it has traditionally been multiplied by 100 to get integer numbers like 100, 85, or 125. What this means is that when we “deflate” nominal figures to get real figures (by dividing the nominal by the price index). We also need to remember to divide the published price index by 100 to make the math work. So the formula becomes: Now read the following Work It Out feature for more practice calculating real GDP. ## Computing gdp It is possible to use the data in [link] to compute real GDP. Step 1. Look at [link] , to see that, in 1960, nominal GDP was$543.3 billion and the price index (GDP deflator) was 19.0.

Step 2. To calculate the real GDP in 1960, use the formula:

We’ll do this in two parts to make it clear. First adjust the price index: 19 divided by 100 = 0.19. Then divide into nominal GDP: $543.3 billion / 0.19 =$2,859.5 billion.

Step 3. Use the same formula to calculate the real GDP in 1965.

Step 4. Continue using this formula to calculate all of the real GDP values from 1960 through 2010. The calculations and the results are shown in [link] .

Converting nominal to real gdp
Year Nominal GDP (billions of dollars) GDP Deflator (2005 = 100) Calculations Real GDP (billions of 2005 dollars)
1960 543.3 19.0   543.3 / (19.0/100) 2859.5
1965 743.7 20.3   743.7 / (20.3/100) 3663.5
1970 1075.9 24.8 1,075.9 / (24.8/100) 4338.3
1975 1688.9 34.1 1,688.9 / (34.1/100) 4952.8
1980 2862.5 48.3 2,862.5 / (48.3/100) 5926.5
1985 4346.7 62.3 4,346.7 / (62.3/100) 6977.0
1990 5979.6 72.7 5,979.6 / (72.7/100) 8225.0
1995 7664.0 82.0  7,664 / (82.0/100) 9346.3
2000 10289.7 89.0 10,289.7 / (89.0/100) 11561.5
2005 13095.4 100.0 13,095.4 / (100.0/100) 13095.4
2010 14958.3 110.0 14,958.3 / (110.0/100) 13598.5

There are a couple things to notice here. Whenever you compute a real statistic, one year (or period) plays a special role. It is called the base year (or base period). The base year is the year whose prices are used to compute the real statistic. When we calculate real GDP, for example, we take the quantities of goods and services produced in each year (for example, 1960 or 1973) and multiply them by their prices in the base year (in this case, 2005), so we get a measure of GDP that uses prices that do not change from year to year. That is why real GDP is labeled “Constant Dollars” or “2005 Dollars,” which means that real GDP is constructed using prices that existed in 2005. The formula used is:

Rearranging the formula and using the data from 2005:

Comparing real GDP and nominal GDP for 2005, you see they are the same. This is no accident. It is because 2005 has been chosen as the “base year” in this example. Since the price index in the base year always has a value of 100 (by definition), nominal and real GDP are always the same in the base year.

Look at the data for 2010.

Use this data to make another observation: As long as inflation is positive, meaning prices increase on average from year to year, real GDP should be less than nominal GDP in any year after the base year. The reason for this should be clear: The value of nominal GDP is “inflated” by inflation. Similarly, as long as inflation is positive, real GDP should be greater than nominal GDP in any year before the base year.

what is the difference between micro and macro economics?
the difference between micro and macro economics is that macro involves economics as a whole and also deals with inflation, unemployment, economic growth while micro deals with the individual house hold
Bernice
money multiplier formula
Use the following information (in rupees): Income (Y) = 1,00,000 Nominal Money Supply (M) = 80,000 Price Level (P) = 20 Calculate the money growth rate required to finance the budget deficit of Rs.10,000 in an economy.
How is economics an art
Why is enomices a science
Michael
when price is falling continuesly this phenomenon is called?
Deflation
siga
hello
Tanvir
what is aggregate demand?
Tanvir
deflation
Ayushi
opposite of inflation when the level of price of all goods and services decreased, and be careful about the level of price not the only price of one good or service
Modek
Inflation is an increase in the general prices of goods and services in an economy. Deflation, conversely, is the general decline in prices for goods and services, indicated by an inflation rate that falls below zero percent.
Mityko
aggregate demand: C + G + I + NX=GDP
siga
what is the simple difference between real GDP and nominal GDP?
Kamaldeen
I wish to proceed for Master in Economics. what books or stuff can assist me
Hal R.Varian For Microeconomics best book
Bilal
If a country's economy GDP increased from 96-to125 between 2003-2004-2005 and the general price level rose by 10%in the same period what was the increase in real GDP?
what is Solow growth model?
The solow growth model shows how saving, population growth and technological progress affect the level of an economy's output and its growth over time.
Peter
in the present scanerio of covid-19 whether eq GDP of pakistan is below or above full employment level?
what newclassical economcs
new keynesianism theory
Solomon
How do commercial banks create credits ?
Commercial banks create credit by advancing loans and purchasing securities. They lend money to individuals and businesses out of deposits accepted from the public. After keeping the required amount of reserves, commercial banks can lend the remaining portion of public deposits.
Neeraj
for an economy the following function have been given. C=100+0.8y, S=100+0.2, i=120-5r, Ms=120, Md=0.2y-5r find out IS equation. LM equation. Equilibrium level of income and interest rate.
Vansiwe
hi
CRISPYN
kenmark pls I need your assistant
Ayodeji
aggregate expenditure model til monetery policy
Using the Solow growth model discuss the implications of the covid19 pandemic on the prospects of long run economic growth for South Africa
ln last word discuss (if. ,at all)changes in the stock prices relate to macroeconomic stability
what do you know about the nigration in labor economic ?
Goleen