Let’s think of this another way. And this is where real GDP comes in.Similar to the nominal gross domestic product, real GDP measures the value of all services and products in a country in a certain period but takes into account the effect of inflation. This is because of inflation. Thus, nominal GDP increased by $1000 (the increase)/$2000 (the nominal GDP in year one)= 50%.But what has happened to real GDP? In year one, the value of apples produced was $1000, and the value of xylophones produced was $1000, so nominal GDP (assuming these are the only two goods in the economy) was $2000. Those who haven’t studied economics in school may have an idea or two about what the Gross Domestic Product is, but the difference between nominal and real GDP is most probably a mystery. How much has real output increased? Real GDP eliminates the effect of price change on GDP. Can we say that Real GDP has increased from 2100 to 2332 Remember that we’re using price here as a common denominator to enable us to “add” quantities of apples and xylophones together. It uses the current price and the current output level.
If prices were held constant, the growth in GDP would have been $91, and not the $200 implied by the nominal GDP.Nominal output is the value of what’s produced, while real output is the quantity of what’s produced (in the previous case, pounds of apples). SoYear Two’s real GDP in dollars is $1091. Nominal GDP can be useful in comparing different quarters of the current year or contrast the economic health of multiple different countries. We know that the[latex]\frac{1000}{0.50}=2000\text{ lbs of apples in year one}[/latex][latex]\frac{1200}{0.55}=2182\text{ lbs of apples in year two}[/latex]The difference in the number of apples produced is 182 lbs. Real GDP eliminates the effect of price change on GDP.
The growth rate (percentage increase) is[latex]\frac{182}{2000}=.091\text{ or }9.1\%[/latex]Now compare this with the growth in the value of apples:[latex]\frac{1200-1000}{1000}=\frac{200}{1000}=0.20\text{ or }20\%[/latex]So, we appeared to be producing 20% more apples, but in reality we were only producing less than half that or 9.1%.In sum, nominal GDP was $1000 in year one and $1200 in year two, while real GDP was 2000 lbs of apples in year one and 2182 lbs in year two.
Comment ( 0) Chapter 7, … Nominal GDP is the monetary measure of output. Real GDP is useful in comparing two or more financial years, and, therefore, it allows you to analyze the economic growth of a country over time. It uses the current price and the current output level. Real GDP rates are typically lower than nominal ones. Real output of apples has increased from 2000 lbs to 2182 lbs. If you’re faced with this dilemma, worry not, as we’ve got you covered!
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contrast the ideas of nominal gdp and real gdp