Unit 2 Notes - Nominal vs. Real GDP/Calculating GDP
GDP Formula - C + Ig + G +Xn
1. Nominal vs. Real GDP
A. Nominal GDP
- Nominal GDP is defined as the value of output (quantity) produced in current year prices
- How to calculate Nominal GDP? - Price x Quantity (P x Q)
- Nominal GDP can increase from year to year if output increases or prices increase
B. Real GDP
- Real GDP is defined as the value of output produced in constant based year prices that is adjusted for inflation
- How to calculate Real GDP? - Price x Quantity (P x Q)
- Real GDP can increase from year to year only if output increases (quantity changes)
C. GDP Deflator
- GDP Deflator is a price index used to adjust from Nominal to Real GDP
- In the base year, the GDP deflator is always equal to 100
- For years after the base year, GDP deflator is less than 100
- How to calculate GDP Deflator? New - Old/Old x 100
***KEY things to remember!***
1. Real GDP is already adjusted for inflation, so the price does not change
2. In years after the base year, Nominal GDP exceeds Real GDP
3. In years before the base year, real GDP exceeds Nominal GDP
D. Expenditure Approach to GDP
Expenditure Approach - Add all spending on final goods and services in a given year
E. Income Approach to GDP
Income Approach - Add all income that resulted from selling all final goods and services produced in a given year
Don't forget to remember the formula for finding the Real and Nominal GDP, but for the Real GDP, make sure use the base year. Then for the GDP Deflator, make sure remember the formula and try not to flip them around when you calculate it on the calculator.
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