Step 11: What is Real? And what is Nominal?

Nominal GDP

Price x Quantity

• value of output produced in current prices
• can increase from year to year if either output or price increase

Real GDP

Price x Quantity

• value of output produced in constant or base year prices
• can increase from year to year only if output increases
• adjusted for inflation

Price Index

• measures inflation by tracking changes in the price of a market basket of goods compared with the base year
• Market basket of goods
• Price x Quantity
• Formula: (price of market basket of goods in current year/ price of market basket of goods in base year) x 100

GDP Deflator

• a price index used to adjust from nominal to real GDP
• in base year
• GDPD = 100
• years after
• GDPD > 100
• years before
• GDPD < 100
• Formula: (nominal GDP/real GDP) x 100

Inflation Rate

• Formula (new deflator - old deflator/old deflator) x 100