{"id":386,"date":"2015-05-04T21:46:48","date_gmt":"2015-05-04T21:46:48","guid":{"rendered":"https:\/\/courses.candelalearning.com\/masterymacro1xngcxmaster\/?post_type=chapter&p=386"},"modified":"2024-04-26T03:12:42","modified_gmt":"2024-04-26T03:12:42","slug":"comparing-nominal-to-real-gdp","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-macroeconomics\/chapter\/comparing-nominal-to-real-gdp\/","title":{"raw":"Comparing Nominal and Real GDP","rendered":"Comparing Nominal and Real GDP"},"content":{"raw":"
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Learning Objectives<\/h3>\r\n
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  • Explain and demonstrate the difference between nominal and real GDP<\/li>\r\n<\/ul>\r\n<\/div>\r\n

    Comparing Nominal and Real GDP<\/h2>\r\nIn the last section, we introduced the difference between real measurements and nominal measurements of the same economic statistic. On this page, we explore this challenging, but important, distinction in more depth.\r\n\r\nTable 1 shows U.S. GDP at five-year intervals since 1960 in nominal dollars<\/strong>; that is, GDP measured using the actual market prices prevailing in each stated year. This data is also reflected in the graph shown in Figure 1.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Table 1. U.S. Nominal GDP (1960-2010)<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
    Year<\/th>\r\n\u00a0Nominal GDP (billions of dollars)<\/th>\r\n\r\n\r\n[caption id=\"attachment_4485\" align=\"aligncenter\" width=\"390\"]\"The Figure 1.<\/strong> U.S. Nominal GDP, 1960\u20132010. Nominal GDP values have risen exponentially from 1960 through 2010, according to the BEA.[\/caption]<\/th>\r\n<\/tr>\r\n
    \u00a01960<\/td>\r\n\u00a0543.3<\/td>\r\n<\/tr>\r\n
    \u00a01965<\/td>\r\n\u00a0743.7<\/td>\r\n<\/tr>\r\n
    \u00a01970<\/td>\r\n\u00a01,075.9<\/td>\r\n<\/tr>\r\n
    \u00a01975<\/td>\r\n\u00a01,688.9<\/td>\r\n<\/tr>\r\n
    \u00a01980<\/td>\r\n\u00a02,862.5<\/td>\r\n<\/tr>\r\n
    \u00a01985<\/td>\r\n\u00a04,346.7<\/td>\r\n<\/tr>\r\n
    \u00a01990<\/td>\r\n\u00a05,979.6<\/td>\r\n<\/tr>\r\n
    \u00a01995<\/td>\r\n\u00a07,664.0<\/td>\r\n<\/tr>\r\n
    \u00a02000<\/td>\r\n\u00a010,289.7<\/td>\r\n<\/tr>\r\n
    \u00a02005<\/td>\r\n\u00a013,095.4<\/td>\r\n<\/tr>\r\n
    \u00a02010<\/td>\r\n\u00a014,958.3<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n
    Source: www.bea.gov, National Accounts<\/td>\r\n<\/tr>\r\n<\/tfoot>\r\n<\/table>\r\nIf an unwary analyst compared nominal GDP in 1960 to nominal GDP in 2010, it might appear that national output had risen by a factor of nearly twenty-seven over this time. This conclusion comes from the simple growth rate formula\u00a0<\/strong>(or percentage change formula):\r\n

    (Final GDP \u2013 Initial GDP) \/ Initial GDP =\u00a0Growth of Nominal GDP<\/p>\r\n

    or<\/p>\r\n

    ($14,958 - $543) \/ $543 = 2653%<\/span><\/p>\r\nThis conclusion, though, would be highly misleading. Recall that nominal GDP<\/strong> is defined as the quantity of every final good or service produced multiplied by the price at which it was sold, summed up for all goods and services. In other words, nominal GDP is the value of output produced:\r\n

    [latex]\\text{Nominal Value of Output}=\\text{Price}\\times\\text{Quantity of Output}[\/latex]<\/p>\r\nWe'll call this the Real-to-Nominal formula<\/strong>.\r\n

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    Watch It<\/h3>\r\nWatch this video to see an example of how inflation can distort our perception of GDP. In this example, we focus on a simplified economy with only one good: apples.\r\n\r\n