Unit 2: Real GDP & Nominal GDP 2/3/17

Nominal GDP: The value of output produced in current year prices.
-Can increase from year to year if either output or prices increase.
Formula: Price X Quantity <= Output

Real GDP: The value of output produced in constant based year prices. Adjusted for inflation.
-Can increase from year to year if only output increases.
Formula: Price X Quantity

• In the base year the current price will always be equal to the constant price (nominal & real GDP will be the same)
• In years after the base year, Nominal GDP will exceed Real GDP 
• In the years before the base year, Real GDP will exceed Nominal GDP

GDP Deflator: A price index used to adjust from Nominal to Real GDP

Formula: Nominal GDP        X 100

                Real GDP

• In the base year GDP Deflator will always equal 100
• Years after the base year, GDP Deflator will be greater than 100
• Years before the base year, GDP Deflator will be less than 100

Consumer Price Index (CPI): Measures inflation by tracking changes in the price of a market basket of goods.

Formula: Price of Market Basket in current year   X 100

                Price of Market Basket in base year