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

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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.

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%

what is price determination?
why are imports subtructed when GDP is calculated in the expenditure approach
nati
what is fiscalpolicy
The way of the government expenses and other analysis
Zubairu
It explains government spending and how it helps to direct the economy towards the desired direction. For instance, if the govt of a nation is desirous of achieving economic growth and development, then the govt will adopt an expansionary fiscal policy which imply more spending by the govt.
Sunday
and politics party important
politics party important
mujtaba
Which party is that
Zubairu
persons who stopped searching for jobs but would accept if the opportunity presents itself
persons who are unemployed whether they are underage, retired or incapacitated
Torissa
what is the impact of fiscal policy in the short and long run in the AD/AS model...
What is demand
Demand is the desire for a commodity backed by the willingness and the purchasing power too.
Ajay
what is the impact of the higher tax rate on the business and the economy at large..?
aggregate demand decreases and GDP decreases in the long run prices will decrease because aggregate supply will shift to the right and increase
Murabit
Thanks, Murabit
Hydrammeh
But still I will need more explanation
Hydrammeh
no problem tax rate is a form of fiscal policy so any time the government changes spending or taxes it will directly affect the economy
Murabit
but remember that there at different economic views on fiscal policy there is classical,Keynesian and moneterism
Murabit
if taxes increase aggregate demand decreases causing a fall in prices causing a fall in the money demand lowering interest rate and increasing investment spending in turn increasing prices
Murabit
thanks so much Murabit
Hydrammeh
what are the policy recommendations for impact of government borrowing?
how can I get Utility notes here
I also want to know
konglan
I have them
Alick
money and money supply
money is anything that is generally accepted as payment of goods and services or that is accepted in settlement of debt.
Money supply?
Money supply is the total value of monetary assets available in an economy at a specific time.
supply of money:- The total quantity of money in an economy at a point of time......
Ittoo
What is the difference between monetary economy and barter economy?
monetary economy is simply an economy where money acts as a medium of exchange and barter economy is why where goods acts as a medium of exchange
Ittoo
Thank you Ittoo.
Ittoo
and no need of thanks dear
Ittoo
Don't damend work in inflation
conceptand variable of macro economics
Hi
Jafta
hi
Prashant
hello
hello
George
macro economics is the study of general factors in an economy.
George
what is fiscal policy?
talukder
fiscal policy refers to the use of government spending,taxation and borrowing to affect economic activity ,monetary policy on the other hand, entails the manipulation of interest rates.
A lots of thanks
talukder
you are welcome
Very informative talukder
Jafta
yes Jafta
talukder
So scarcity will always be a problem, is something that can't be solved due to specialization of labor and choice?
Jafta
yes right Jafta
talukder
good definition Jata♥♥
talukder
how are you all
Nurul
well
Asma
good
talukder
Kindly explain or give example of Voluntary unemployment.
when unemployment doesn't choose a accept job at wage of rate
talukder
Thanks Talukder
hi
kura
macroeconomics is not too hard
Omar
wow Omar, ur so helpful lol🤣
Alex
good ho every one
what's up guys■■
I want someone to tell me everything about the inflation and and hyber inflation is plz
Lolla
hi someone to explain to mi notes ov money and banking
prossie
yes
Manjil
dia explain to me notes of money and banking
prossie
dot US Army higher South Korean citizen for the US base South Korea and pay them 50000 as a result
What is production possibility frontier
Production possibility frontier is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The production possibility curve is frontir that all inputs are used efficiently.
.
what are some examples of a monetary policy?
expansionary policy contractionary policy
Steve