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Value  =  Price × Quantity      or Nominal GDP  =  GDP Deflator × Real GDP

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.

Coolshirt's nominal revenue from sales  =  Price × Quantity  =  $9 × 10  =  $90


Coolshirt's real income  =  Nominal revenue Price  =  $90 $9  =  10

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:

Real GDP  =  Nominal GDP Price Index

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:

Real GDP  =  Nominal GDP Price Index / 100

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:

Real GDP  =  Nominal GDP Price Index / 100  =  $543.3 billion 19 / 100  =  $2,859.5 billion

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.

Real GDP  =  Nominal GDP Price Index / 100  =  $743.7 billion 20.3 / 100  =  $3,663.5 billion

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] .

(Source: Bureau of Economic Analysis, www.bea.gov)
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:

GDP deflator  =  Nominal GDP Real GDP  × 100

Rearranging the formula and using the data from 2005:

Real GDP  =  Nominal GDP Price Index / 100  =  $13,095.4 billion 100 / 100  =  $13,095.4 billion

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.

Real GDP  =  Nominal GDP Price Index / 100  =  $14,958.3 billion 110 / 100  =  $13,598.5 billion

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.

Questions & Answers

What is the role of price system in The market economy
Cyrielle Reply
(1).Income is the main determined of macro economics. (a). true (b). false
Manisha Reply
tell me correct ans with examples!!
what yes yes?
mam actually I want to say that income is not the main determinant of macro economics.
based on your knowledge about the production possibility frontier,demonstrate an assumption of supposed schedule of ppe for the production of rice and face masks by Bangladesh.use graphical representation as well
Ashraf Reply
can you answer this
whats tradeoff
tradeoff is a balance achieved between two desirable but conflicting things
can I read in Hindi?
Rashmi Reply
don't know..
why not
Omid Amini....how?
sure thing
mention two necessities of estimation of national income in india ?
Krishna Reply
what means the supply
Abdourahamane Reply
its means amount of product available right now.
is everything important here🙂
I mean anything*
u can read it
it's mean something needed or wanted
where are from shweta
where are you from shweta
it may mean the stock available
to make something needed or wanted available to someone
is someone who manufactures something
What is the cost-benefit analysis?
Hannah Reply
A cost benefit analysis is a process by which organizations can analyze decisions, systems or projects, or determine a value for intangibles. The model is built by identifying the benefits of an action as well as the associated costs and subtracting the costs from benefits.
Cost benefit analysis is a process used primarily by businesses that weighs the sum of the benefits, such as financial gain, of an action against the negatives, or costs, of that action.
process of cost benefit analysis and decision making crieteria
hello everyone
hello every one,
hello everyone
what is the opportunity cost?
The next best option forgone is call the Opportunity cost of selection one.
who is producer?
rishabh Reply
karan johar
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it's serious question..
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simple who produce good
who is aconsumer?
Ritik Reply
who uses the commodity
a consumer is one that buys good for consumption .
Kanza consumers uses the commodity..
why do we put tariff on import goods
Salam Reply
Maybe to give national enterprises better opportunities than foreign ones... or just to get more money to the national budget in any way possible. I suppose it allows also to control import and therefore its influence on national economy and other countries economy too.
i think to control import or for development of his own industry
what were the events during the great depression that made classical economy tenets ineffective
Alby Reply
please what is the answer for the following question; derive the expression for a two sector Keynesian model from sowotuom land economy and state all the two components in the expression.
Alby Reply
No idea
meaning nature and scope of macroeconomics
Diksha Reply
meaning of macroeconomics
meaning of macroeconomics
meaning of macroeconomics
Macroeconomics covers aggregate or in simple words overall economy of country or world while microeconomics was just concerned with individual economies
Hope this helped you, you can search it more on Google there is a YouTube page by the name of jacob Clifford
How aggregate demand and output gap are related explain in the light of keynesian cross diagram
Muhammad Reply

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