NOMINAL

GDP
vs.
REAL GDP
measures the price of a specially
selected collection of goods and
services.
a market basket in a given
year is compared to the price of the
same collection of goods and
services in a reference year.
Any Price Index
measures the combined price of a
particular collection of goods and
services that make up the GDP (C,
I
g
, G, X
n
).
helps to adjust the Nominal GDP
to a Real GDP figure.
GDP Deflator
NOMINAL GDP vs. REAL GDP
Nominal GDP
reflects the current price level
of goods and services
ignores the effect of inflation on
the growth of GDP.
this measure is called Current
Dollar GDP.
Real GDP
measures the value of goods and services
adjusted for change in the price level. It reflects
the real change in output.
This measure is called Constant Dollar GDP
indicates what the GDP would be if the
purchasing power of the dollar has not changed
from what it was in a base year. The government
currently uses 2000 as its base year for GDP
Deflator.
NOMINAL GDP vs. REAL GDP
GDP Price Index
Price Index
in a given
year
=
Price of market basket
in specific year
Price of same market
basket in base year
x 100
Real GDP =
Nominal GDP
Price Index
(in hundredths)
Price Index
(in hundredths)
=
Nominal GDP
Real GDP
An Alternative Method
NOMINAL GDP vs. REAL GDP
Nominal Values
Deflate GDP when prices rise
Inflate GDP when prices fall
NOMINAL GDP vs. REAL GDP

1
2
3
4
5
5
7
8
10
11
$ 10
20
25
30
28
100
200
250
-
-
$ 50
140
200
-
-
$ 50
70
80
-
-
(2)
Price
Pizza
Per Unit
(1)
Units of
Output
Year
(3)
Price Index
Year 1 =
100
(4)
Unadjusted,
or Nominal,
GDP,
(1)x(2)
(5)
Adjusted,
Or Real,
GDP
Calculating Real GDP

280
300
1
2
3
4
5
5
7
8
10
11
$ 10
20
25
30
28
100
200
250
$ 50
140
200
-
-
$ 50
70
80
-
-
(2)
Price
Pizza
Per Unit
(1)
Units of
Output
Year
(3)
Price Index
Year 1 =
100
(4)
Unadjusted,
or Nominal,
GDP,
(1)x(2)
(5)
Adjusted,
Or Real,
GDP
Price Index
in a given
year
=
Price of market
basket
in specific year
Price of same market
basket in base year
x 100
Year 1 Base Year 100
Year 2 $20/10 x 100 = 200
Year 3 $25/10 x 100 = 250
Year 4 $30/10 x 100 = 300
Year 5 $28/10 x 100 = 280
Real GDP
=
Nominal GDP
Price Index
(in hundredths)
Year 1 NGDP=RGDP
Year 2 $140/2 = $70 RGDP
Year 3 $200/2.5 = $80 RGDP
Year 4 $300/3 = $100 RGDP
Year 5 $308/2.8 = $110 RGDP

280
300
1
2
3
4
5
5
7
8
10
11
$ 10
20
25
30
28
100
200
250
$ 50
140
200
$ 50
70
80
(2)
Price
Pizza
Per Unit
(1)
Units of
Output
Year
(3)
Price Index
Year 1 =
100
(4)
Unadjusted,
or Nominal,
GDP,
(1)x(2)
(5)
Adjusted,
Or Real,
GDP
300
308
100
110
GDP Index Numbers
Year GDP Index
2000 100.00
2001 102.402
2002 104.097
2003 106.003
2004 110.393
www.bea.gov 1/28/05 report
2004
Nominal GDP
$11,728,000,000,000
Real GDP
10,837,200,000,000

a measure of the
average change over
time in the prices paid
by urban consumers
for a market basket of
consumer goods and
services.
The Consumer Price Index (CPI)
Changes in the CPI are designed
to measure the rate of inflation
facing consumers.
GDP Deflator is designed to convert
Nominal GDP into Real GDP.
GDP Deflator VS. CPI
GDP Deflator Compared to the CPI
[CPI is normally higher.]