unit 2: real and nominal GDP

Nominal GDP- it is the value of outputs produced in current year prices
formula: P x Q

can increase from year to year if either output increases or prices increases

Real GDP- it is the true value of output produced in constant base year prices that is adjusted for inflation
formula: base year of the P x Q

can increase from year to year only if output increases

Base year- in the base year, current prices is equal to constant prices
base year= nominal GDP = Real GDP

• after: in years after the base year nominal GDP exceeds real GDP 
• before: in years before the base year real GDP exceeds nominal GDP 

GDP Deflator- a price index used to adjust from nominal GDP to real GDP in the base year, the GDP deflator = 100

for years after base year > 100

for years before base year < 100 

formula: new-old/ old x 100

Consumer Price Index
Measures inflation by tracking changes in the price fo a market basket of goods.


= Price of the market basket of goods in the current year
______________________________________________*100


Price of the market basket of goods in the Base year