Unit II (GDP Calculations)

• Nominal GDP

- the value of output produce in current prices- it can increase from year to year if price and quantity increase- measure price increase (inflation)- FORMULA: price x quantity

• Real GDP:

- the value of output produces in current prices (already adjusted for inflation)- it can increase ONLY if quantity increases- measures economic growth- FORMULA: price x quantity

• GDP Deflator:

- price index used to adjust from nominal to real GDP- FORMULA: nominal GDP/real GDP x 100

• Consumer Price Index (CPI)

- the most commonly used measurement of inflation for consumers- FORMULA: current year/base year x 100 (new-old/old x100)

• How to calculate inflation:

-GDP Deflator/price index of year 2 - GDP Deflator/price index of year 1 / GDP Deflator/ price index of year 1 x 100 (new-old/old x100)

• In the base year, GDP deflator = 100
• For years after the base year, GDP deflator is greater than 100.
• For years before the base year, GDP deflator is less than 100.