Nominal GDP vs Real GDP

11 Key excerpts on "Nominal GDP vs Real GDP"

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  eBook - ePub

  Macroeconomics For Dummies

  • Dan Richards, Manzur Rashid, Peter Antonioni(Authors)
  • 2016(Publication Date)
  • For Dummies

    (Publisher)

  A different choice wouldn’t affect the graph of nominal GDP but would change the graph of real GDP to ensure that it was equal to nominal GDP during the base year. For example, if the base year was 2006, the real GDP “number” for all the years would be much lower than the numbers in Figure 4-1, and nominal and real GDP would be equal in that year. That’s not because a different base year affects total output or living standards, but because the real GDP figures would be based on what prices were in 2006. One final point: Like nominal GDP, real GDP is still measured in dollar values, for example, $16.4 trillion at the end of 2015. But the dollar values used to calculate real GDP are unchanging, that is, they reflect the prices from the base year. For this reason, real GDP is often called “constant dollar” GDP. It’s a measure of the total production in dollars of a constant value — ones that are not losing value due to inflation (or gaining it due to deflation). Identifying the components of GDP As we’ve emphasized, this special one good called GDP is incredibly flexible. You can take some of it and turn it into manufacturing goods, some into wholesale and retails services, and some into defense goods and services. In fact, we do exactly that. Currently, we use about 16 percent of our GDP for manufacturing, about 14 percent for wholesale and retail trade, and about 4 percent for federal defense outlays. The rest goes for all other things — healthcare, transportation, education, and so on. That’s how we constructed GDP in the first place. We added all the value added from each sector into one total. Once we’ve got the total, though, we can reclassify how we slice up that GDP in other ways. We could do it regionally — GDP in the West, in the South, in the North and East, or by state

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  eBook - ePub

  Understanding Economic Equilibrium

  Making Your Way Through an Interdependent World

  • Thomas J. Cunningham, Mike Shaw(Authors)
  • 2021(Publication Date)
  • Business Expert Press

    (Publisher)

  PART II

  GDP and Consumption

  Passage contains an image

  CHAPTER 4

  GDP: The Perfectly Imperfect Measurement

  Gross domestic product (GDP) is likely the most featured, argued over, concerning, and sometimes even misleading economic indicator. A measure of the value of all final goods and services produced in an economy, GDP is as important as it is imperfect. The annual growth in GDP, expressed as a percentage, is our proxy for how the economy is doing. But it is not a definitive metric for economic well-being; it is compromised by a number of shortcomings.

  There are two ways to measure GDP: real and nominal. Real GDP is the figure we hear most, that number bandied about quarterly or at the end of a year as the measure of the country’s economic progress. “Real” is considered the better measurement of underlying activity because it gauges the actual change in the quantity of goods and services produced—that is, it adjusts for inflation—while nominal GDP is the tally of spending on final goods and services and thus can be enlarged by inflation.

  Nominal GDP is less preferred because spending changes for two reasons: you’re either buying more things or paying more because of inflation. If nominal GDP increases by 2 percent and inflation over the same period is also 2 percent, real GDP is zero. There is no real growth. Both measures are important to monitor, but changes in real GDP tell us how much more (or less) is being produced.

  By focusing on the final sales of goods and services GDP keeps us from being misled by double counting. For example, buying a car. The automobile you buy comes with tires; they’re an “intermediate good.” They are produced, of course, but if you count them as goods sold on their own, then count the purchase price of the car at its sale, you’re double-counting the tires—not to mention the many other parts that get made, sold to the auto manufacturer, and built into your car.

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  UFS BUSINESS SCHOOL EDITION ECONOMIC INDICATORS

  • P Mohr, D Yu, S Adendorff(Authors)
  • 2020(Publication Date)
  • Van Schaik Publishers

    (Publisher)

  The transformation of GDP at current prices to GDP at constant prices is a complicated process. Nominal GDP is broken down into its different components and each of these is then converted to values measured at the prices ruling in the base period. The values of the different components at constant prices are then added together to obtain real GDP. Details of these processes fall beyond the scope of this book. However, the difference between valuation at current prices and valuation at constant prices (ie between nominal and real values) is crucially important when national accounting data are analysed or interpreted.

  TABLE 2-3 Nominal and real GDP and nominal and real growth rates, 2010 to 2018

  Year	GDP at current market prices (nominal GDP)	GDP at constant 2010 prices (real GDP)	Growth rates (% change since previous year)
  	(R millions)	(R millions)	Nominal	Real
  2010	2 748 008	2 748 008	–	–
  2011	3 023 659	2 838 258	10,0	3,3
  2012	3 253 851	2 901 076	7,6	2,2
  2013	3 539 977	2 973 176	8,8	2,5
  2014	3 805 350	3 028 090	7,5	1,8
  2015	4 049 884	3 064 237	6,4	1,2
  2016	4 359 061	3 076 465	7,6	0,4
  2017	4 653 579	3 119 984	6,8	1,4
  2018	4 873 899	3 144 539	4,7	0,8

  Source: SARB Quarterly Bulletin, March 2019.

  2.7 SOME PROBLEMS ASSOCIATED WITH GDP

  Although GDP is the best available measure of aggregate activity in the domestic economy, it is not a perfect measure. As a result, GDP is sometimes jokingly referred to as the “grossly deceptive product” or the “grossly distorted picture”. Users of national accounting data should always remember that the estimation of total production, income and expenditure in the economy is an enormous task. Various conceptual and measurement problems are encountered; it is often difficult to define precisely what should be measured, and the information is also often inadequate. As a result, the compilation of the national accounts involves liberal use 30

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  The Macroeconomic Environment of Business

  Core Concepts and Curious Connections

  • Maurice D Levi(Author)
  • 2014(Publication Date)
  • WSPC

    (Publisher)

  Inflation, which means a general increase in prices, will raise the GDP and national income; we will be adding higher values of goods or incomes because the prices of the goods and levels of incomes are higher. However, we do not wish to say a country is better off just because dollar values of production and incomes are higher. People are better off only if there is a larger quantity of goods and services for them to enjoy. Similarly, people are better off only if their incomes will purchase a larger quantity of products.

  In order to obtain a measure of real economic performance that does not show an improvement merely because prices have risen we need to measure the change in the GDP that would have occurred if all prices had remained unchanged. In order to do this the national income accountant:

  (1)Measures physical outputs of everything each year, and

  (2)values all outputs each year at the prices in a common, base year.

  The physical outputs of all items each year are valued at the common base year prices before they are added up to obtain the GDP. By valuing the output of each year at the same base year prices the national income accountant derives the value of output at unchanged prices. The relevance of this measure, and the way it is calculated, can be seen by an example.

  Adjusting GDP for Inflation: An Example: Imagine a very small and simple economy that produces only six items. Table 1.4 summarizes the amounts produced and the prices during two years that are a decade apart.

  Table 1.4. Real GDP can be compared between years without the distortion of inflation.

  Nominal or current-price GDP is the value of output each year at current prices. Real or constant-price GDP is the value of output during each year at base-year prices. Changes in real GDP occur only from changes in the volumes of outputs, and not from changes in prices. During periods of inflation real GDP increases less than nominal GDP.

  The dollar value of GDP, where the value is assessed at prices prevailing at the time the goods and services are produced, is called the nominal GDP or current-price GDP. Sometimes the label current-dollar GDP

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  Contemporary Economics

  An Applications Approach

  • Robert Carbaugh(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)
• Although GDP is our best single measure of the value of the output produced by an economy, it is not a perfect measure of economic well-being. For example, GDP ignores transactions that do not take place in organized markets. GDP also ignores the underground economy as well as changes in the environment that arise through the production of output. Furthermore, GDP does not account for leisure, nor does it show how much output is available per person. Finally, GDP does not reflect the quality and kinds of goods that compose a nation’s output.
• Nominal GDP, or current-dollar GDP, is expressed in terms of the prices existing in the year in which goods and services were produced. Real GDP, or constant-dollar GDP, is nominal GDP adjusted to eliminate changes in prices. It measures actual (real) production and shows how actual production—rather than the prices of what is produced—has changed. Real GDP is superior to nominal GDP for assessing rates of economic growth.
• An economy realizes economic growth when it increases its full production level of output over time. The rate of economic growth is the percentage change in the level of economic activity from one year to the next. Typically, analysts look at the rate of growth in an economy’s real GDP.
• The keys to long-run economic growth are the incentives that induce individuals to work and firms to invest in production technology, within the limits imposed by demographics and the rate of technological advancement. Among the major determinants of economic growth are natural resources, physical capital, human capital, and economic efficiency. Government may enact policies to foster economic growth, such as boosting productivity by increasing domestic saving, stimulating research and development, working to reduce trade barriers, and improving the efficiency of regulation. Governments may also target and subsidize specific industries that might be especially important for technological progress.
• According to the traditional theory of economic growth as pioneered by Adam Smith, economic efficiency is spurred by perfect competition. Traditional growth theory emphasizes two resources—labor and capital. Technological progress is viewed as being outside the scope of economic theory, and thus something that we accept as a given.