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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 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
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Manisha
yes
The
what yes yes?
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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
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JUSTIN Reply
tradeoff is a balance achieved between two desirable but conflicting things
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hi
Aleem
its means amount of product available right now.
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is everything important here🙂
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it's mean something needed or wanted
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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
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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.
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who is producer?
rishabh Reply
karan johar
Mohd
shut up mr.mohd
rishabh
it's serious question..
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simple who produce good
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who is aconsumer?
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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.
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No idea
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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
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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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