2.6 Real v. Nominal GDP

Define nominal GDP and real GDP.

• Nominal GDP is a measure of how much is spent on output. Real GDP is a measure of how much is produced.
• Nominal GDP measures aggregate output using current prices. Real GDP measures aggregate output using constant prices, thus removing the effect of changes in the overall price level.
• Enduring understanding MEA-1: An economy’s performance can be measured by different indicators such as gross domestic product (GDP), the inflation rate, and the unemployment rate.

Calculate real GDP and the GDP deflator.

• One way of measuring real GDP is to weigh final goods and services by their prices in a base year. Because this can lead to overstatement of real GDP growth, statistical agencies actually use different methods.
• Nominal GDP can be converted to real GDP by using the GDP deflator.
• Enduring understanding MEA-1: An economy’s performance can be measured by different indicators such as gross domestic product (GDP), the inflation rate, and the unemployment rate.