Define: GDP, nominal GDP, and Real GDP

Define: GDP, nominal GDP, and Real GDP

Define: GDP, nominal GDP, and Real GDP

Total output (goods and services) for the U.S is tracked in 12-month periods, and each of these periods are compared to one another over time, One way of tracking this $ amount is to determine the amounts that were spent for these goods and services by four different ‘spending groups’.  These groups include consumer spending (consumption), investment, government spending, and ‘net’ exports (the $ value of exports minus the $ value of imports).  As a means of review, define these four groups.

Another way to measure total output is by tracking ‘national income’, or the $ amount of money paid to produce all the goods and services during the 12- month period.  List the income types that make up ‘national income’.

Keep in mind that total output (GDP) is an economic indicator that is compared over time, or put another way, we hope that its value increases over time, because if it does, that indicates that more goods and services are being produced, and the economy is moving forward. However, the value of GDP can also increase due to inflation, or rising prices of goods and services.  This complicates things in that, during inflationary periods an increasing GDP value is not caused by increased output, but rather increased prices.  To filter out the effects of inflation, we use the GDP deflator, which takes into account price changes in goods and services from one 12- month period to another 12-month period.

One last comment before we use the GDP deflator.  Nominal GDP is the GDP value that is simply reported for a 12-month period, given that period’s current prices, while Real GDP is GDP which has been adjusted for inflation, using the GDP deflator.

Here is the situation:  In 1990 the nominal GDP was $5963 billion, and in 1991 it was $6158 billion.  At first glance it appears the 1991 GDP increased $195 billion.  Let’s analyze the two periods using the GDP deflator as follows:

Real GDP 1991 = nominal 1991 GDP divided by (deflator for 1991 divided by the deflator for 1990), or $6158 billion divided by (68.5 divided by 66.2), or $6158 billion divided by 1.0347 = $5952 billion.  Note that, adjusted for inflation, Real 1991 GDP actually decreased, and was not equal to the 1990 value of $5963 billion. One final note about the deflator values in this situation.  Based on the deflator values of 68.5 and 66.2, one can determine that the prices of goods and services rose by 2.3% from 1990 to 1991 (68.5 minus 66.2), thus the overstated GDP nominal value of $6158 billion for 1991.

Using the example above, calculate the following: In 1991 nominal GDP was $6158 billion, and in 1992 it was $6520 billion. It appears, on a nominal basis, that GDP increased $362 billion during this time period. Calculate Real 1992 GDP if the 1992 deflator was 70.0, and the 1991 deflator was 68.5.

List and define the four parts of the business cycle

List several areas that are excluded in GDP accounting

Briefly explain the ‘circular flow of income