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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

Explain the differences between aggregate demand shocks and aggregate supply shocks
Swagger Reply
what are the measures being taken to reduce inflation in LDCs
Athumam Reply
increase level of production,reduce rates of tax charged
mashauri
What is economic growth!
Doris Reply
Microeconomics can simply be refers to as the study of a unit economy while macroeconomics can be regarded as a study of economy as a whole or aggregate economy of a country.
Hamzat Reply
Full employment price stability economic growth
Hamzat
using geometry, discuss the four interrelated flows in the circular flows of income
Ahmed Reply
who is there?
SHAHRUKH Reply
Demand refers to the quantity of a commodity that one can buy supported by the willingness and the ability to buy
Noor Reply
Which of the following are assets of the Federal Reserve? a. Treasury bills held by the Federal Reserve b. cash in circulation c. Loans made by commercial banks d. the reserves of commercial banks at the Federal Reserve
Julya Reply
D
Neeha
a
Sushovan
d
Roger
what are the four functions served by money
Michele Reply
It serves as a medium of exchange
Zaharaddeen
It serves as a store of value
Zaharaddeen
It serves as a unit of account
Umar
It also serves as a standard for Differed Payment.
Umar
Acts as a measure of value.
Humphrey
acceptability
GGPS
hi
Shaxboz
hello
Md
welcome
Shaxboz
Hey, I am a new member.
Abdul
Store of value
Bokwe
Hello i want your help if there is someone online
Athumam
hello
Prem
how are you doing
Athumam
what is balance of payment deficit
Athumam
A nation or region, which is deficit in exports, and Imports more goods and services and for the payment for imports, it must be borrowed from other states or Nations. mostly, between countries.
Prem
Pls Wat ar D Factors to Consedered To Saving
IBRAHIM
savings
BENJAMIN
Yah
IBRAHIM
Yes
IBRAHIM
Hello guys how are you doing
Tantoh
I will say a balance of payment deficit is when a country import more goods,services and capital than it export.The country most borrowed from other countries to pay for it imports.
Tantoh
income
Vivek
can anyone tell me that why in the income and consumption curve the income is on x axis?
bechar Reply
why inflation in double digit is not good for economy
Obaid Reply
what is mean by zero inflation
Obaid
some time it is good but some time it is not...
bechar
the condition of that economy tell you. is it good are bad?
bechar
the definition of the law of demand
Aley Reply
law of damand states all else remains constant or what we can say is ceteris peribus,quantity demanded for a commodity extends with fall in price and vice versa. law of demand explains inverse relationship between price and qua ntity demanded
Gaurav
What is demand and supply
Antwi Reply
Demand refers to how much of that product, item, commodity, or service consumers are willing and able to purchase at a particular price. In other words, supply refers to how much the producers of a product or service are willing to produce and can provide to the market with limited amount of resou
Husna
Hello dear
habibrahman
what is gdp per capital and why it is used for?
Era Reply
gross domestic product
prince
gdp per capita is the gross domestic product per person (GDP/population) and is a better indicator of economic health and living standards than GDP alone.
Gina
thank you so much 😘
Era
please explain shift in production possibility curve
Kobby
advances in technology can cause a shift in the ppf because output can increase with use of the same amount of resources (laborers can produce more efficiently, and suppliers are willing to sell more)
Gina
but equally natural shocks ie earthquakes or war can move the ppf inward so reducing production capicity
jax
what is crowding out effect?
Sera Reply
What is SAT AND GPA
prince

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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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