Nominal GDP: the value of output produced at current prices.
- can increase from year to year if either output or prices increase.
- Nominal GDP= Price X Quantity
Real GDP: the value of output produced at constant based year prices.
- it is adjusted for inflation
- Real GDP= Price X Quantity
- can increase from year to year only if output increases
Key Tips:
- If you want to measure economic growth, you measure Real GDP
- Only in the base year does Real GDP equal to Nominal GDP
- In years after the base year, Nominal GDP will exceed Real GDP
- In years before the base year, Real GDP will exceed Nominal GDP
- If base year is not given, the earliest year is the base year
GDP Deflator: a price index that is used to adjust from Nominal to Real GDP
- GDP Deflator= (Nominal GDP/ Real GDP) x 100
Consumer Price Index (CPI): it measures inflation by tracking changes in the price of a market basket of goods.
- CPI= (Price of Market basket in current year/ Price of market basket in base year) x 100
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