<< Chapter < Page Chapter >> Page >
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

Then,

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
yes
Anjali
tell me correct ans with examples!!
Manisha
yes
The
what yes yes?
Manisha
mam actually I want to say that income is not the main determinant of macro economics.
The
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
hay
Ashraf
hlo
Karan
can you answer this
Ashraf
whats tradeoff
JUSTIN Reply
tradeoff is a balance achieved between two desirable but conflicting things
Faith
can I read in Hindi?
Rashmi Reply
don't know..
Azka
why not
Omid
Omid Amini....how?
Rashmi
sure thing
Faith
mention two necessities of estimation of national income in india ?
Krishna Reply
what means the supply
Abdourahamane Reply
hello
mosisa
hii
SHWETA
hi
Aleem
its means amount of product available right now.
Aleem
is everything important here🙂
Alizy
I mean anything*
Alizy
u can read it
Aleem
it's mean something needed or wanted
Alizy
where are from shweta
Aleem
where are you from shweta
Aleem
Hello
Anas
it may mean the stock available
DR
to make something needed or wanted available to someone
Faith
is someone who manufactures something
Faith
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.
sanga
thanks!
Hannah
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.
ALIM
process of cost benefit analysis and decision making crieteria
Santosh
hello everyone
BtsARMY
hello every one,
Dereje
hello everyone
waqar
what is the opportunity cost?
SHWETA
The next best option forgone is call the Opportunity cost of selection one.
Oshadi
who is producer?
rishabh Reply
karan johar
Mohd
shut up mr.mohd
rishabh
it's serious question..
rishabh
shut up mr.mohd
rishabh
simple who produce good
Alizy
who is aconsumer?
Ritik Reply
who uses the commodity
Kanza
a consumer is one that buys good for consumption .
rishabh
Kanza consumers uses the commodity..
rishabh
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.
Pawe
i think to control import or for development of his own industry
RAJPOOTCHANAL
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
ahmad
meaning nature and scope of macroeconomics
Diksha Reply
meaning of macroeconomics
Diksha
meaning of macroeconomics
Diksha
meaning of macroeconomics
Diksha
Macroeconomics covers aggregate or in simple words overall economy of country or world while microeconomics was just concerned with individual economies
Hamza
Hope this helped you, you can search it more on Google there is a YouTube page by the name of jacob Clifford
Hamza
How aggregate demand and output gap are related explain in the light of keynesian cross diagram
Muhammad 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?

Ask