Real GDP vs. Nominal GDP- February 03, 2017

Real GDP vs. Nominal GDP

• Nominal GDP:
  -Value of output produced in current year prices
  -Can increase from year to year, if either output or price increase
  -P * Q
  -In the base year, real & nominal GDP are equal
  -In years after the base year, nominal will exceed
  -Current Quantity * Current price
• Real GDP:
  -Value of output produced in constant based year prices.
  -Adjusts for inflation
  -Only increases if output increases
  -P * Q
  -Measures economic growth
  -Current quantity * Base year Price
• GDP Deflator:
  -Price index used to adjust from Nominal to Real GDP
  -(Nominal GDP/Real GDP) * 100
  -In the base year, GDP deflator will always equal to 100
  -For years after that, GDP deflator is greater than 100
  -For years before the base year, GDP deflator is less than 100
• Consumer Price Index (CPI)
  -Measures inflation by tracking changes in the price of a market basket of goods
  -(Price of market Basket in current year/Price of market basket in base year) *100