19.2 Adjusting Nominal Values to Real Values - Principles of Economics 3e

Key Topics

• Difference between nominal GDP and real GDP
• Role of inflation in economic statistics
• GDP deflator's importance
• Calculation of real GDP from nominal GDP

Distinction between Nominal and Real Values

• Nominal Value: Economic statistic measured in actual prices at the time.
• Real Value: Adjusted for inflation to reflect true economic value.
• Importance of knowing inflation rates for accurate economic analysis.
• Real values typically more important for economic analysis.

Converting Nominal to Real GDP

• Nominal GDP: Sum of all goods/services produced, valued at current prices.
• Real GDP: Nominal GDP adjusted for inflation using the GDP deflator.

U.S. GDP Data (1960-2020)

• Table 19.5 lists nominal GDP and GDP deflator from 1960 to 2020.
• Nominal GDP appeared to increase 38-fold from 1960 to 2010.
• Much of this growth is due to inflation, not actual increase in goods/services.

GDP Deflator

• GDP Deflator: Price index measuring average prices of all final goods/services.
• Essential for converting nominal GDP to real GDP.
• Illustrates how price levels have risen since 1960.
• Example: GDP deflator rose from 17 in 1960 to 113 in 2020.

Calculating Real GDP

• Formula: [ \text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Price Index}/100} ]
• Example:
  • 1960: Real GDP calculated as $2,859.5 billion.
  • 2012: Base year where nominal and real GDP are the same.

Real GDP Calculations (Selected Years)

• 1960: $3,267.5 billion (Real)
• 1970: $4,946.1 billion (Real)
• 2020: $18,392.3 billion (Real)

Base Year Concept

• Base year prices used to calculate real GDP.
• Real GDP labeled as constant dollars (e.g., 2012 dollars).
• Nominal = Real GDP in base year.

GDP Growth Rate

• Real GDP growth from 1960 to 2020 was approximately 463%.
• Illustrated using percentage change formula: [ \text{Growth Rate} = \frac{\text{2020 Real GDP} - \text{1960 Real GDP}}{\text{1960 Real GDP}} \times 100 ]

Conclusion

• Real GDP offers clearer insight into actual economic growth, excluding inflation effects.
• Understanding of nominal vs. real values crucial for economic analysis.