NOMINAL GDP, REAL

GDP, AND GDP DEFLATOR

Nominal GDP
Nominal GDP is gross domestic product
measured in current dollars.
Current dollars are the current prices we
pay for goods and services.
In calculating Nominal GDP,
NGDP = (PxQ)+(PxQ)+(PxQ)(PxQ)
Real GDP
Real GDP is nominal GDP adjusted for
price changes or the value of final goods
and services evaluated at base-year
prices.
Values are in constant dollars.
In calculating Real GDP (using the fixed
weight procedure),
RGDP = (Pby X Q) + (Pby X Q)+ (Pby X
Q)
 Example (using fixed-weight procedure)

TABLE 6.6 A Three-Good Economy

(1) (2) (3) (4) (5) (6) (7) (8)

GDP in GDP in GDP in GDP in

Year 1 Year 2 Year 1 Year 2

in in in in

Production Price Per Unit Year 1 Year 1 Year 2 Year 2

Year 1 Year 2 Year 1 Year 2 Prices Prices Prices Prices

Q1 Q2 P1 P2 P1 x Q1 P1 x Q2 P2 x Q1 P2 X Q2

Good A 6 11 $0.50 $0.40 $3.00 $5.50 $2.40 $4.40

Good B 7 4 0.30 1.00 2.10 1.20 7.00 4.00

Good C 10 12 0.70 0.90 7.00 8.40 9.00 10.80

Total $12.10 $15.10 $18.40 $19.20

Nominal GDP Nominal

in year 1 GDP
in year 2
 Fixed-weight Procedure a procedure
that uses weights from a given base
year.

Weight (price weights or quantity weights) the

importance assigned to an item within a
group of items.
Base Year the year chosen for the
weights in a fixed-weight procedure.
 Exercise:
Compute for the:
a) Nominal GDP for each year
b)Real GDP for each year using the 2006 prices as
the base year
NGDP 2006
NGDP2006 = Q2006 x P2006
= (90 x $50.00) Window Washing
+ (75 x $2.00) Baseballs
+ (50 x $30.00) Hammers
= $6,150
NGDP 2007
NGDP2007 = Q2007 x P2007
= (100 x $60.00) Window Washing
+ (100 x $2.00) Baseballs
+ (50 x $25.00) Hammers
= $7,450
NGDP 2008
NGDP2008 = Q2008 x P2008
= (100 x $65.00) Window Washing
+ (120 x $2.25) Baseballs
+ (65 x $25.00) Hammers
= $8,395
RGDP 2006
RGDP2006 = Q2006 x P2006
= (90 x $50.00) Window Washing
+ (75 x $2.00) Baseballs
+ (50 x $30.00) Hammers
= $6,150
RGDP 2007
RGDP2007 = Q2007 x P2006
= (100 x $50.00) Window
Washing
+ (100 x $2.00) Baseballs
+ (50 x $30.00) Hammers
= $6,700
RGDP 2008
RGDP2008 = Q2008 x P2006
= (100 x $50.00) Window
Washing
+ (120 x $2.00) Baseballs
+ (65 x $30.00) Hammers
= $7,190
GDP Deflator
GDP deflator is used in measuring the
average price level in the economy.

NGDPt
GDP _ Deflatort 100
RGDPt
GDP Deflator
GDP Deflator2007 = (7,450/6,700) x
100
= 111.19
GDP Deflator2008 = (8,395/7,190) x

100
= 116.76