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[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.

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%
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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%
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Questions & Answers

what newclassical economcs
Solomon Reply
new keynesianism theory
Solomon
How do commercial banks create credits ?
Hussein Reply
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.
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CRISPYN
aggregate expenditure model til monetery policy
Sadia Reply
Using the Solow growth model discuss the implications of the covid19 pandemic on the prospects of long run economic growth for South Africa
Simthembile Reply
ln last word discuss (if. ,at all)changes in the stock prices relate to macroeconomic stability
rachel Reply
what do you know about the nigration in labor economic ?
Goleen
how do I find savings in a national income question calculation
Ayo Reply
Savings = Income - consumption... Remember Y=C+I+G-(X-M)
Mike
what is the most issue of macroeconomic?
Tarik Reply
Unemployment since it covers the youth and all the pension leavers.
aboagye
I would say economic growth. Economic growth stems from proper use of factors of Productions, good political reforms, investments (Foreign & local), employment, low levels of inflation & stable currency.
Mike
Calculate the cross elasticity of demand by using the following data: Price of petrol rises from Rs. 20 per litre to Rs. 25 per litre so as the demand for cars falls from 50 per month to 30 per month.
karnika Reply
what does it indicate when there is an increase in supply
Sisanda Reply
cost of production might have decreased whereas price must have been increased also interest rate might have been lowered
kazim
it indicates that the demand for goods in the market is lesser than the supply caused by an increase in prices thereby leading to inflation
Angel
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KEJI Reply
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Sana Reply
the branch of economics that focuses on board issue such as growth unemployment inflation and trade balance.
Ghazi
money in a modern economic
Vishal Reply
Use the table below answer questions the following question Variables R millions Current consumption expenditure by the general government 15 000 Indirect Taxes on products 5 000 Private consumption expenditure by households 10 000 Exports of goods and services to the rest of the world 5 0
Aphiwe Reply
an economy starts off with a GDP per capita of $5000. How large will the GDP per capita be if it grow at an annual rate of 2% for 20years
King Reply
5000*(1+0.02)*20=7,450 USD
Modek
Nice
Mike

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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