nominal gdp vs real gdp

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Nominal GDP Vs Nominal GDP Vs Real GDP Real GDP Part II of Unit 3—measuring Part II of Unit 3—measuring domestic output domestic output

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Nominal GDP Vs Real GDP. Part II of Unit 3—measuring domestic output. GDP. Reminder: GDP is a figure including every item produced in the economy. Money is the common denominator that allows us to add the total output. Nominal GDP. - PowerPoint PPT Presentation

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Page 1: Nominal GDP Vs Real GDP

Nominal GDP Vs Nominal GDP Vs Real GDPReal GDP

Part II of Unit 3—measuring Part II of Unit 3—measuring domestic outputdomestic output

Page 2: Nominal GDP Vs Real GDP

GDPGDP

Reminder: GDP is a figure Reminder: GDP is a figure including every item produced in including every item produced in the economy. the economy.

MoneyMoney is the common is the common denominator that allows us to denominator that allows us to add the total output.add the total output.

Page 3: Nominal GDP Vs Real GDP

Nominal GDPNominal GDP Is the market value of all final g & s Is the market value of all final g & s

produced in a year.produced in a year. Calculated using current prices when the Calculated using current prices when the

output was producedoutput was produced Includes inflationIncludes inflation It is hard to compare market values from It is hard to compare market values from

year to year when the value of the $ itself year to year when the value of the $ itself changes (inflation or deflation)changes (inflation or deflation) To measure changes in the quantity of output, To measure changes in the quantity of output,

we need a “yardstick” that stays the same size.we need a “yardstick” that stays the same size.

Page 4: Nominal GDP Vs Real GDP

Real GDPReal GDP

The value of the final g & s produced The value of the final g & s produced in a given year expressed in the in a given year expressed in the prices of a base yearprices of a base year 20002000

Nominal Vs Real

Page 5: Nominal GDP Vs Real GDP

Traditional Method of Traditional Method of Calculating Real GDPCalculating Real GDP

This economy produces apples & This economy produces apples & orangesoranges

The base year is 2000. Since 2000 is The base year is 2000. Since 2000 is the base year, real and nominal GDP the base year, real and nominal GDP are the same.are the same.

Page 6: Nominal GDP Vs Real GDP

To find the real GDP in 2000, + the value of To find the real GDP in 2000, + the value of apples & oranges produced in 2000 using apples & oranges produced in 2000 using the table:the table:

Value of apples = 60 apples X $.50 = $30Value of apples = 60 apples X $.50 = $30

Value of oranges = 80 oranges X $.25 = $20Value of oranges = 80 oranges X $.25 = $20 Real GDP in 2000 = $30 + $20 = $50Real GDP in 2000 = $30 + $20 = $50

GDP DataGDP Data ForFor 20002000

ItemItem QQ PP

ApplesApples 6060 $.50$.50

OrangesOranges 8080 $.25$.25

Page 7: Nominal GDP Vs Real GDP

To calculate real GDP in 2006, + the value of To calculate real GDP in 2006, + the value of apples and oranges using the prices of 2000apples and oranges using the prices of 2000

Value of apples = 160 apples X $.50 = $80Value of apples = 160 apples X $.50 = $80 Value of oranges = 220 oranges X $.25 = $55Value of oranges = 220 oranges X $.25 = $55 Real GDP in 2006 = $80 + $55 = $135Real GDP in 2006 = $80 + $55 = $135

Real GDP is “constant dollars” or “2000 dollars” Real GDP is “constant dollars” or “2000 dollars” measure (taken inflation out)measure (taken inflation out)

GDP DataGDP Data ForFor 20062006

ItemItem QQ PP

ApplesApples 160160 $1.00$1.00

OrangesOranges 220220 $2.00$2.00

Page 8: Nominal GDP Vs Real GDP

2 purposes of estimating 2 purposes of estimating Real GDPReal GDP

To compare the standard of living over To compare the standard of living over time (based on quantity, not price)time (based on quantity, not price)

To compare the standard of living among To compare the standard of living among countriescountries

Page 9: Nominal GDP Vs Real GDP

Price IndexPrice Index A measure of the price of a specified A measure of the price of a specified

collection of g & s (market basket) in a given collection of g & s (market basket) in a given year as compared to the price of an identical year as compared to the price of an identical collection of g & s in a reference year.collection of g & s in a reference year.

PI = PI = price of market basket for a specific yearprice of market basket for a specific year X 100 X 100 price of same market basket in the base year price of same market basket in the base year

Find Real GDP = Find Real GDP = Nominal GDPNominal GDP X 100 X 100

PIPI

Page 10: Nominal GDP Vs Real GDP

GDP DeflatorGDP Deflator An average of current prices expressed An average of current prices expressed

as a percentage of base year prices.as a percentage of base year prices. Measures the price levelMeasures the price level

The average level of pricesThe average level of prices

GDP deflator = (NGDP / RGDP) X 100GDP deflator = (NGDP / RGDP) X 100 ($135 / $50) X 100 = GDP deflator($135 / $50) X 100 = GDP deflator

2.7 X100 = 2702.7 X100 = 270

If NGDP rises but RGDP remains If NGDP rises but RGDP remains unchanged, prices have risen.unchanged, prices have risen.

Page 11: Nominal GDP Vs Real GDP

Real GDP and the Price Real GDP and the Price LevelLevel

Deflating the GDP BalloonDeflating the GDP BalloonNominal GDP increases because production—real GDP– Nominal GDP increases because production—real GDP– increases. increases.

Page 12: Nominal GDP Vs Real GDP

Real GDP and the Price Real GDP and the Price LevelLevelDeflating the GDP BalloonDeflating the GDP BalloonNominal GDP also increases because prices rise.Nominal GDP also increases because prices rise.

Page 13: Nominal GDP Vs Real GDP

Real GDP and the Price Real GDP and the Price LevelLevelDeflating the GDP BalloonDeflating the GDP BalloonWe use the GDP deflator to let the air out of the nominal We use the GDP deflator to let the air out of the nominal GDP balloon and reveal real GDP.GDP balloon and reveal real GDP.

Page 14: Nominal GDP Vs Real GDP

The Consumer Price The Consumer Price IndexIndex(CPI)(CPI)

Index the gov’t uses to measure Index the gov’t uses to measure inflationinflation

Gov’t uses it to adjust SS benefits Gov’t uses it to adjust SS benefits and income tax bracketsand income tax brackets

Reports 300 items in a market Reports 300 items in a market basketbasket

Page 15: Nominal GDP Vs Real GDP

InflationInflation

A rise in the general level of pricesA rise in the general level of prices Inflation rate = Inflation rate = current CPI-Index CPI current CPI-Index CPI = rate (X 100)= %= rate (X 100)= %

index CPIindex CPI

or or Year2 – Year1Year2 – Year1 = rate (X 100) = % = rate (X 100) = %

Year1Year1