Practice
Real and nominal GDP
Nominal GDP at current prices, real GDP at base-year prices, the GDP deflator, and real growth.
The skill
Nominal GDP values each year's output at that year's prices. Real GDP values it at base-year prices, so only changes in quantity can move it. Multiply each good's quantity by the right price and add. The GDP deflator is nominal GDP divided by real GDP, times 100, and dividing nominal GDP by the deflator over 100 turns it back into real GDP. Using current-year prices for real GDP is the usual mistake, and it makes the deflator come out as exactly 100.
A worked example
An economy produces only two final goods.
| Good | 2020 quantity | 2020 price ($) | 2025 quantity | 2025 price ($) |
|---|---|---|---|---|
| Haircuts | 110 | 7 | 107 | 9 |
| Bicycles | 160 | 14 | 167 | 17 |
Using 2020 as the base year, what is the GDP deflator in 2025? Round to one decimal place.
Solution
- Nominal GDP in 2025 uses 2025 prices: 107 × 9 + 167 × 17 = $3,802.
- Real GDP in 2025 uses the 2020 prices, so only the quantities change: 107 × 7 + 167 × 14 = $3,087.
- GDP deflator = nominal ÷ real × 100 = 3,802 ÷ 3,087 × 100 ≈ 123.2.
Answer: 123.2