{"id":4983,"date":"2017-07-26T12:55:00","date_gmt":"2017-07-26T12:55:00","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-macroeconomics\/?post_type=chapter&#038;p=4983"},"modified":"2018-04-18T13:37:20","modified_gmt":"2018-04-18T13:37:20","slug":"the-difference-between-nominal-and-real-gdp","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/chapter\/the-difference-between-nominal-and-real-gdp\/","title":{"raw":"The Difference Between Nominal and Real Measurements","rendered":"The Difference Between Nominal and Real Measurements"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Objectives<\/h3>\r\n<ul>\r\n \t<li>Contrast nominal measurements and real measurements of economic statistics<\/li>\r\n<\/ul>\r\n<\/div>\r\n<h2>Nominal Measurements and Real Measurements<\/h2>\r\nWhen examining economic statistics, there is a crucial distinction you need to be aware of. The distinction is between nominal and real measurements, which refers to whether or not the measurement has been corrected for inflation. This is important because inflation distorts economic magnitudes, making them look bigger than they really are.\r\n\r\n[caption id=\"attachment_5796\" align=\"alignright\" width=\"494\"]<img class=\"wp-image-5796\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/20144349\/Screen-Shot-2017-10-20-at-9.43.18-AM.png\" alt=\"Michael Jordan and Christiano Ronaldo.\" width=\"494\" height=\"320\" \/> <strong>Figure 1<\/strong>. If basketball superstar Michael Jordan made 78.3 million dollars in 1997, but soccer phenomenon Christiano Ronaldo made 93 million dollars in 2017, who made more? In order to find out, you need to adjust for inflation! (The answer is Jordan).[\/caption]\r\n\r\nLooking at economic statistics without considering inflation is like looking through a pair of binoculars and trying to guess how close something is: unless you know how strong the lenses are, you cannot guess the distance very accurately. Take GDP for example. If you do not know the inflation rate, it is difficult to figure out if a rise in GDP is due mainly to a rise in the overall level of prices or to a rise in quantities of goods produced.\r\n\r\nThe <strong>nominal value<\/strong> of any economic statistic means that we measure the statistic in terms of actual prices that exist at the time. For example, nominal GDP in 2015 is measured as the quantity of each final good and service produced in 2015 times the price at which it was sold in 2015. Similarly, nominal GDP in 2016 is measured using 2016 prices. (If you\u2019re thinking \u201cWhat else would it be,\u201d be patient.) If you look at a table or graph of economic data and the label says \u201cbillions of dollars,\u201d you can be sure that you\u2019re looking at nominal data.\r\n\r\nThe <strong>real value<\/strong> refers to the same statistic after it has been adjusted for inflation. We will explain the details of how this is done shortly, but for now just know that real values are computed using prices that existed in a single year, say 2015. In other words, real GDP in 2016 is measured as the quantity of each final good and service produced in 2016 times the price <em>which existed in 2015<\/em>. For this reason, real data are sometimes described as \u201cconstant dollars\u201d or \u201c2015 dollars.\u201d Thus, if you look at a table or graph of economic data and the label says \u201cbillions of 2015 dollars,\u201d you know that you\u2019re looking at real data.\r\n\r\nAnother way to explore the real value of a good is to compare the prices of goods as percentages of hourly wages across time, as shown in Figure 2.\u00a0Because this measurement is independent from prices and therefore inflation, it estimates the real cost of goods and services.\r\n\r\n[caption id=\"attachment_7229\" align=\"aligncenter\" width=\"646\"]<img class=\"wp-image-7229\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/06013813\/chart.jpeg\" alt=\"Graph showing how the prices of 10 consumer goods fluctuate as a percentage of average hourly earnings, from 1997 to 2016. Milk and ground chuck beef are at the top (with milk being more expensive in 1997, but the reverse holding true in 2016). Then come orange juice, gasoline, eggs, chicken, bread, gas utilities, bananas, and electricity.\" width=\"646\" height=\"672\" \/> <strong>Figure 2.\u00a0The Real Cost of Consumer Items.\u00a0<\/strong>This graph shows how the price of ground chuck beef would cost an hourly worker 17.9% of their hourly wage (11 minutes of work) in 2016. A gallon of whole milk would cost 9 minutes of work, and a gallon of gas would cost 6 minutes.[\/caption]\r\n\r\nHere\u2019s the thing: most data are collected in nominal terms, but generally it is real measurements that are more important. Let\u2019s read on to look at the details of how we convert from one to the other.\r\n<div class=\"textbox tryit\">\r\n<h3>Try It<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/6979\r\n\r\n<\/div>\r\n<div class=\"textbox examples\">\r\n<h3>Watch It<\/h3>\r\nWatch this video to review the differences and the need for differentiating between real and nominal GDP.\r\n\r\n<iframe src=\"https:\/\/www.youtube.com\/embed\/29S7FzI7s7g?list=PLF2A3693D8481F442\" width=\"853\" height=\"480\" frameborder=\"0\"><\/iframe>\r\n\r\n<\/div>\r\n<div class=\"textbox learning-objectives\">\r\n<h3>Glossary<\/h3>\r\n<dl class=\"definition\">\r\n \t<dt>[glossary-page][glossary-term]nominal value:[\/glossary-term][glossary-definition] an economic statistic measured using actual market prices; i.e. nominal values are\u00a0not adjusted for inflation; contrast with real value[\/glossary-definition][glossary-term]real value: [\/glossary-term][glossary-definition]an economic statistic measured\u00a0after it has been adjusted for inflation; contrast with nominal value[\/glossary-definition][\/glossary-page]<\/dt>\r\n<\/dl>\r\n<\/div>\r\n<dl class=\"definition\">\r\n \t<dt><\/dt>\r\n<\/dl>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Objectives<\/h3>\n<ul>\n<li>Contrast nominal measurements and real measurements of economic statistics<\/li>\n<\/ul>\n<\/div>\n<h2>Nominal Measurements and Real Measurements<\/h2>\n<p>When examining economic statistics, there is a crucial distinction you need to be aware of. The distinction is between nominal and real measurements, which refers to whether or not the measurement has been corrected for inflation. This is important because inflation distorts economic magnitudes, making them look bigger than they really are.<\/p>\n<div id=\"attachment_5796\" style=\"width: 504px\" class=\"wp-caption alignright\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-5796\" class=\"wp-image-5796\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/20144349\/Screen-Shot-2017-10-20-at-9.43.18-AM.png\" alt=\"Michael Jordan and Christiano Ronaldo.\" width=\"494\" height=\"320\" \/><\/p>\n<p id=\"caption-attachment-5796\" class=\"wp-caption-text\"><strong>Figure 1<\/strong>. If basketball superstar Michael Jordan made 78.3 million dollars in 1997, but soccer phenomenon Christiano Ronaldo made 93 million dollars in 2017, who made more? In order to find out, you need to adjust for inflation! (The answer is Jordan).<\/p>\n<\/div>\n<p>Looking at economic statistics without considering inflation is like looking through a pair of binoculars and trying to guess how close something is: unless you know how strong the lenses are, you cannot guess the distance very accurately. Take GDP for example. If you do not know the inflation rate, it is difficult to figure out if a rise in GDP is due mainly to a rise in the overall level of prices or to a rise in quantities of goods produced.<\/p>\n<p>The <strong>nominal value<\/strong> of any economic statistic means that we measure the statistic in terms of actual prices that exist at the time. For example, nominal GDP in 2015 is measured as the quantity of each final good and service produced in 2015 times the price at which it was sold in 2015. Similarly, nominal GDP in 2016 is measured using 2016 prices. (If you\u2019re thinking \u201cWhat else would it be,\u201d be patient.) If you look at a table or graph of economic data and the label says \u201cbillions of dollars,\u201d you can be sure that you\u2019re looking at nominal data.<\/p>\n<p>The <strong>real value<\/strong> refers to the same statistic after it has been adjusted for inflation. We will explain the details of how this is done shortly, but for now just know that real values are computed using prices that existed in a single year, say 2015. In other words, real GDP in 2016 is measured as the quantity of each final good and service produced in 2016 times the price <em>which existed in 2015<\/em>. For this reason, real data are sometimes described as \u201cconstant dollars\u201d or \u201c2015 dollars.\u201d Thus, if you look at a table or graph of economic data and the label says \u201cbillions of 2015 dollars,\u201d you know that you\u2019re looking at real data.<\/p>\n<p>Another way to explore the real value of a good is to compare the prices of goods as percentages of hourly wages across time, as shown in Figure 2.\u00a0Because this measurement is independent from prices and therefore inflation, it estimates the real cost of goods and services.<\/p>\n<div id=\"attachment_7229\" style=\"width: 656px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-7229\" class=\"wp-image-7229\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/06013813\/chart.jpeg\" alt=\"Graph showing how the prices of 10 consumer goods fluctuate as a percentage of average hourly earnings, from 1997 to 2016. Milk and ground chuck beef are at the top (with milk being more expensive in 1997, but the reverse holding true in 2016). Then come orange juice, gasoline, eggs, chicken, bread, gas utilities, bananas, and electricity.\" width=\"646\" height=\"672\" \/><\/p>\n<p id=\"caption-attachment-7229\" class=\"wp-caption-text\"><strong>Figure 2.\u00a0The Real Cost of Consumer Items.\u00a0<\/strong>This graph shows how the price of ground chuck beef would cost an hourly worker 17.9% of their hourly wage (11 minutes of work) in 2016. A gallon of whole milk would cost 9 minutes of work, and a gallon of gas would cost 6 minutes.<\/p>\n<\/div>\n<p>Here\u2019s the thing: most data are collected in nominal terms, but generally it is real measurements that are more important. Let\u2019s read on to look at the details of how we convert from one to the other.<\/p>\n<div class=\"textbox tryit\">\n<h3>Try It<\/h3>\n<p>\t<iframe id=\"lumen_assessment_6979\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=6979&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_6979\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<div class=\"textbox examples\">\n<h3>Watch It<\/h3>\n<p>Watch this video to review the differences and the need for differentiating between real and nominal GDP.<\/p>\n<p><iframe loading=\"lazy\" src=\"https:\/\/www.youtube.com\/embed\/29S7FzI7s7g?list=PLF2A3693D8481F442\" width=\"853\" height=\"480\" frameborder=\"0\"><\/iframe><\/p>\n<\/div>\n<div class=\"textbox learning-objectives\">\n<h3>Glossary<\/h3>\n<dl class=\"definition\">\n<dt>\n<div class=\"titlepage\">\n<dl>\n<dt>nominal value:<\/dt>\n<dd> an economic statistic measured using actual market prices; i.e. nominal values are\u00a0not adjusted for inflation; contrast with real value<\/dd>\n<dt>real value: <\/dt>\n<dd>an economic statistic measured\u00a0after it has been adjusted for inflation; contrast with nominal value<\/dd>\n<\/dl>\n<\/div>\n<\/dt>\n<\/dl>\n<\/div>\n<dl class=\"definition\">\n<dt><\/dt>\n<\/dl>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-4983\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Modification, adaptation, and original content. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Adjusting Nominal Values to Real Values. <strong>Authored by<\/strong>: OpenStax College. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:O3I2vr0L@7\/Adjusting-Nominal-Values-to-Re\">https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:O3I2vr0L@7\/Adjusting-Nominal-Values-to-Re<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em>. <strong>License Terms<\/strong>: Download for free at http:\/\/cnx.org\/contents\/bc498e1f-efe9-43a0-8dea-d3569ad09a82@4.44<\/li><li>(Macro) Episode 21: Real GDP. <strong>Authored by<\/strong>: Dr. Mary J. McGlasson. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.youtube.com\/watch?v=29S7FzI7s7g&#038;index=21&#038;list=PLF2A3693D8481F442\">https:\/\/www.youtube.com\/watch?v=29S7FzI7s7g&#038;index=21&#038;list=PLF2A3693D8481F442<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc-nd\/4.0\/\">CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives <\/a><\/em><\/li><li>Christiano Ronaldo. <strong>Provided by<\/strong>: Wikimedia. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/commons.wikimedia.org\/wiki\/File:Cristiano_Ronaldo_20120609.jpg\">https:\/\/commons.wikimedia.org\/wiki\/File:Cristiano_Ronaldo_20120609.jpg<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">Public domain content<\/div><ul class=\"citation-list\"><li>Michael Jordan. <strong>Authored by<\/strong>: Steve Lipofsky. <strong>Provided by<\/strong>: Wikimedia. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/commons.wikimedia.org\/wiki\/File:Jordan_Lipofsky.jpg\">https:\/\/commons.wikimedia.org\/wiki\/File:Jordan_Lipofsky.jpg<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/pdm\">Public Domain: No Known Copyright<\/a><\/em><\/li><li>Prices of consumer goods as a percentage of average hourly earnings. <strong>Provided by<\/strong>:  U.S. Bureau of Labor Statistics . <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.bls.gov\/opub\/ted\/2017\/pound-of-ground-beef-cost-17-point-9-percent-of-average-hourly-earnings-in-2016.htm\">https:\/\/www.bls.gov\/opub\/ted\/2017\/pound-of-ground-beef-cost-17-point-9-percent-of-average-hourly-earnings-in-2016.htm<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/pdm\">Public Domain: No Known Copyright<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":29,"menu_order":8,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Adjusting Nominal Values to Real Values\",\"author\":\"OpenStax College\",\"organization\":\"\",\"url\":\"https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:O3I2vr0L@7\/Adjusting-Nominal-Values-to-Re\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"Download for free at http:\/\/cnx.org\/contents\/bc498e1f-efe9-43a0-8dea-d3569ad09a82@4.44\"},{\"type\":\"original\",\"description\":\"Modification, adaptation, and original content\",\"author\":\"\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"(Macro) Episode 21: Real GDP\",\"author\":\"Dr. Mary J. McGlasson\",\"organization\":\"\",\"url\":\"https:\/\/www.youtube.com\/watch?v=29S7FzI7s7g&index=21&list=PLF2A3693D8481F442\",\"project\":\"\",\"license\":\"cc-by-nc-nd\",\"license_terms\":\"\"},{\"type\":\"pd\",\"description\":\"Michael Jordan\",\"author\":\"Steve Lipofsky\",\"organization\":\"Wikimedia\",\"url\":\"https:\/\/commons.wikimedia.org\/wiki\/File:Jordan_Lipofsky.jpg\",\"project\":\"\",\"license\":\"pd\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Christiano Ronaldo\",\"author\":\"\",\"organization\":\"Wikimedia\",\"url\":\"https:\/\/commons.wikimedia.org\/wiki\/File:Cristiano_Ronaldo_20120609.jpg\",\"project\":\"\",\"license\":\"cc-by-sa\",\"license_terms\":\"\"},{\"type\":\"pd\",\"description\":\"Prices of consumer goods as a percentage of average hourly earnings\",\"author\":\"\",\"organization\":\" U.S. Bureau of Labor Statistics \",\"url\":\"https:\/\/www.bls.gov\/opub\/ted\/2017\/pound-of-ground-beef-cost-17-point-9-percent-of-average-hourly-earnings-in-2016.htm\",\"project\":\"\",\"license\":\"pd\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"4b3a734c-cd66-4afc-bc0b-aa7c29fd74b7,ee7b6724-ab95-4c52-80ab-c30ea7178fed","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-4983","chapter","type-chapter","status-publish","hentry"],"part":184,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/4983","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/users\/29"}],"version-history":[{"count":31,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/4983\/revisions"}],"predecessor-version":[{"id":9338,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/4983\/revisions\/9338"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/parts\/184"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/4983\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/media?parent=4983"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapter-type?post=4983"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/contributor?post=4983"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/license?post=4983"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}