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# Calculating GDP. Nominal GDP, Real GDP and the GDP Deflator

## 1. Calculating GDP

Nominal GDP, Real GDP, and theGDP Deflator

## 2. There are two ways that GDP can increase:

1.2.

An increase in the PRICES of goods and

services.

An increase in the QUANTITY of goods

and services.

We need a method to calculate GDP that

addresses rising prices

## 3. Our Simple Economy

Suppose an economy produces threegoods or services, Window Washing,

Baseballs, and Hammers. Data for the

past three years can be found below.

## 4. Prices and Quantities for our Simple Economy

## 5. Nominal GDP

Step 1: Calculate Nominal GDP (The valueof final goods and services evaluated at

current-year prices) for each year:

NGDP2006 = Q2006 x P2006

= (90 x $50.00) Window Washing

+ (75 x $2.00) Baseballs

+ (50 x $30.00) Hammers

= $6,150

## 6. Nominal GDP 2007

NGDP2007 = Q2007 x P2007= (100 x $60.00) Window Washing

+ (100 x $2.00) Baseballs

+ (50 x $25.00) Hammers

= $7,450

## 7. Nominal GDP 2008

NGDP2008 = Q2008 x P2008= (100 x $65.00) Window Washing

+ (120 x $2.25) Baseballs

+ (65 x $25.00) Hammers

= $8,395

## 8. Real GDP

Step 2: Calculate Real GDP (The value offinal goods and services evaluated at

base-year prices) for each year. For our

example assume 2006 is the base year.

This means that all values are in what we

call “2006 Dollars”, or “Constant Dollars”.

## 9. Real GDP

By using the prices from the base-year,(or holding prices constant over time), we

eliminate the impact that rising prices

have on GDP, to get a measure of “Real”

economic activity.

## 10. Real GDP in 2006

RGDP2006 = Q2006 x P2006= (90 x $50.00) Window Washing

+ (75 x $2.00) Baseballs

+ (50 x $30.00) Hammers

= $6,150

Note: For the Base-Year Nominal GDP

always equals Real GDP

## 11. Real GDP in 2007

RGDP2007 = Q2007 x P2006= (100 x $50.00) Window Washing

+ (100 x $2.00) Baseballs

+ (50 x $30.00) Hammers

= $6,700

Note: We use “Current Quantities” and “Constant

Prices”.

## 12. Real GDP in 2008

RGDP2008 = Q2008 x P2006= (100 x $50.00) Window Washing

+ (120 x $2.00) Baseballs

+ (65 x $30.00) Hammers

= $7,190

Note: We still use “Current Quantities” and

“Constant Prices”.

## 13. The General Formula for Calculating a Growth Rate

New _ Value Old _ ValuePercent _ Change %

100

Old _ Value

X t X t 1

Percent _ Change %

100

X t 1

## 14. Calculate the Growth Rate in Real GDP between 2006 and 2007

%Change = [(RGDP2007 – RGDP2006)/RGDP2006] x 100%Change = [(6,700 – 6,150)/6,150] x 100

%Change = 8.94%

That is real GDP grew by 8.94% between 2006 and 2007.

## 15. Calculate the Growth Rate in Real GDP between 2007 and 2008

%Change = [(RGDP2008 – RGDP2007)/RGDP2007] x 100%Change = [(7,190 – 6,700)/6,700] x 100

%Change = 7.31%

That is real GDP grew by 7.31% between 2007 and 2008.

## 16. The Price Level

We can use our calculations of Nominal GDPand Real GDP to calculate the Price Level

(A measure of the average prices of goods

and services in the economy.)

## 17. The GDP Deflator

One example of a measure of the averageprice level is the GDP deflator.

NGDPt

GDP _ Deflatort

100

RGDPt

## 18. Calculate the GDP Deflator for 2006

GDP Deflator2006 = (NGDP2006/RGDP2006) x 100GDP Deflator2006 = (6,150/6,150) x 100 = 100

Note: The GDP Deflator is always equal to 100 in

the base-year.

The Price Index is “unitless”

## 19. Calculate the GDP Deflator for 2007 and 2008

GDP Deflator2007 = (NGDP2007/RGDP2007) x 100GDP Deflator2007 = (7,450/6,700) x 100 = 111.19

GDP Deflator2008 = (NGDP2008/RGDP2008) x 100

GDP Deflator2008 = (8,395/7,190) x 100 = 116.76

## 20. The Inflation Rate

We can use the growth rate formula fromprevious to calculate the Inflation Rate

(the Inflation Rate is The percentage

increase in the price level from one year

to the next.)

## 21. Calculate the Inflation Rate from 2006 to 2007

Inflation Rate Between 2006 and 2007 =[(GDP Def.2007 – GDP Def.2006)/GDP Def.2006] x 100

Inflation Rate Between 2006 and 2007 =

[(111.19 – 100)/100] x 100 = 11.19

That is the inflation rate between 2006 and 2007

was 11.19%.

## 22. Calculate the Inflation Rate from 2007 to 2008

Inflation Rate Between 2007 and 2008 =[(GDP Def.2008 – GDP Def.2007)/GDP Def.2007] x 100

Inflation Rate Between 2007 and 2008 =

[(116.76 – 111.19)/111.19] x 100 = 5.01

That is the inflation rate between 2007 and 2008

was 5.01%.