Real and Nominal GDP

Nominal GDP - The value of output produced in current prices; can increase from year to year if either output or prices increase

Nominal GDP = Price X Quantity

Real GDP - The value of output produced in constant base year prices

- Adjusted for inflation

- Price X Quantity

- Can increase from year to year only if output increases

- Only in base year is Real GDP equal to Nominal GDP.

- If we want to measure economic growth, we look at Real GDP

- In years after the base year, Nominal GDP will exceed Real GDP. In years before the base year, Real GDP will exceed Nominal GDP.

GDP Deflator - Price index that is used to adjust from Nominal to Real GDP.

- GDP Def = Nominal GDP / Real GDP X 100

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

- CPI = Price of current market basket / Price of base year market basket X 100