l2.3 RGDP Versus NGDP

Macroeconomics - Real vs Nominal GDP Worksheet
Real vs Nominal Values

Prices in an economy do not stay the same. Over time the price level changes (i.e., there is inflation
or deflation). A change in the price level changes the value of economic measures denominated in
dollars. Values that increase or decrease with price level are called nominal values. Real values are
adjusted for price changes. That is, they are calculated as though prices did not change from the
base year. For example, gross domestic product (GDP) is used to measure fluctuations in output.
However, since GDP is the dollar value of goods and services produced in the economy, it increases
when prices increase. This means that nominal GDP increases with inflation and decreases with
deflation. But when GDP is used as a measure of short-run economic growth, we are interested in
measuring performance—real GDP takes out the effects of price changes and allows us to isolate
changes in output. Price indices are used to adjust for price changes. They are used to convert
nominal values into real values.
Changing Nominal GDP to Real GDP

To use GDP to measure output growth, it must be converted from nominal to real. Let’s say nominal
GDP in Year 1 is $1,000 and in Year 2 it is $1,100. Does this mean the economy has grown 10
percent between Year 1 and Year 2? Not necessarily. If prices have risen, part of the increase in
nominal GDP for Year 2 will represent the increase in prices. GDP that has been adjusted for price
changes is called real GDP. If GDP isn’t adjusted for price changes, we call it nominal GDP.
The GDP deflator is a type of price index, or form of measurement, that tracks changes in the value
of goods produced in a nation from one year to another. Here is the formula to find the real GDP in a
given year using the GDP deflator:
real GDP = nominal GDP x 100
GDP deflator
If the GDP deflator is not provided, the following is the formula:
GDP deflator = nominal GDP x 100
real GDP
To compute real output growth in GDP from one year to another, subtract real GDP for Year 2 from
real GDP from Year 1. Divide the answer by real GDP in Year 1 Here’s the formula:
Output growth = (real GDP in Year 2 – real GDP in Year 1) x 100
real GDP in Year 1
For example, if real GDP in Year 1 = $1,000 and in Year 2 = $1,028, then the output growth rate
from Year 1 to Year 2 is 2.8% [(1,028-1,000)/1,000 = .028].
To understand the impact of output changes, we usually look at real GDP per capita. To do so, we
divide the real GDP of any period by a country’s average population during the same period. This
procedure enables us to determine how much of the output growth of a country simply went to
supply the increase in population and how much of the growth represented improvements in the
standard of living of the entire population. In our example, let’s say the population in Year 1 was 100
and in Year 2 it was 110. What is the real GDP per capita in Years 1 and 2?
Page 1
Year 1
Real GDP per capita = Year 1 real GDP = $1,000 = $10
Population in year 1 1100
Year 2
Real GDP per capita = $1,028 = $9.30
110
In this example, real GDP per capita fell even though output growth was positive. Developing
countries with positive output growth but higher rates of population growth often experience this
condition.
Activity 1: Nominal GDP to Real GDP

Use the table below to answer the questions 1-6.
Nominal GDP
GDP deflator Population
Year 3 $5,000 125 11
Year 4 $6,600 150 12
1. What is the real GDP in Year 3 and Year 4?

Year 3: $4000
Year 4: $4400
2. What is the real GDP per capita in Year 3?
$363.63
3. What is the real GDP per capita in Year 4?
$366.67
4. What is the rate of real output growth between Years 3 and 4?
10%
5. What is the rate of real output growth per capita between Years 3 and 4? (Hint: Use per capita
data in the output growth rate formula.)
0.83%
Page 2
Activity 2: Nominal GDP to Real GDP
The economy of Grossmania produces three goods: Widgets, Gizmos, and Thingamajigs. The
accompanying table shows the output and prices for years 2006 and 2007. (Hint: GDP, in its most
basic form, is P x Q. You take the quantity of output and multiply by the price of output.)
Widgets Gizmos Thingamajigs
Year Price Quantity Price Quantity Price Quantity
2006 $100 1 $10 8 $5 4
2007 $110 1 $12 10 $4 5
7. Calculate the nominal GDP for:
a. 2006
$200
b. 2007
$250
8. Compute the percentage of growth in nominal GDP from 2006 to 2007.
25%
9. Using 2006 as the base year, calculate the real GDP for 2007.
$225
10. What is the GDP deflator for 2007? What was the inflation rate between 2006 and 2007?
GDP Deflator 2007: 111.1

AIR: 11.1%
11. Compute the real rate of output growth (economic growth) from 2006 to 2007.
12.5%
Page 3
12. Which of the following is true of real GDP?
I. It is adjusted for changes in prices.
II. It is always equal to nominal GDP.and oranges.
III. It increases whenever aggregate output increases.
a. I only
b. II only
c. III only
d. I and III think again
e. I, II, and III
13. The best measure for comparing a country’s aggregate output over time is:
a. Nominal GDP.
b. Real GDP.
c. Nominal GDP per capita.
d. Real GDP per capita.
e. Average GDP per capita.
For questions 14-15 use the information provided in the table below for an economy that produces
apples and oranges. Assume year 1 is the base year.
Year 1 Year 2
Quantity of Apples 3,000 4,000
Price of Apples $0.20 $0.30
Quantity of Oranges 2,000 3,000
Price of Oranges $0.40 $0.50
14. What was the value of real GDP in each year?

Year 1 Year 2
a. $1,400 $2,700
b. $1,900 $2,700
c. $1,400 $2,000
d. $1,900 $2,000
e. $1,400 $1,900
15. What is the GDP Deflator for Year 2?

a. 105
b. 135
c. 136
d. 142
e. 143
Page 4

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Macroeconomics - Real vs Nominal GDP Worksheet

Real vs Nominal Values

Changing Nominal GDP to Real GDP

Activity 1: Nominal GDP to Real GDP

1. What is the real GDP in Year 3 and Year 4?

2. What is the real GDP per capita in Year 3?

3. What is the real GDP per capita in Year 4?

4. What is the rate of real output growth between Years 3 and 4?

7. Calculate the nominal GDP for:

8. Compute the percentage of growth in nominal GDP from 2006 to 2007.

GDP Deflator 2007: 111.1

14. What was the value of real GDP in each year?

15. What is the GDP Deflator for Year 2?

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