2 Any Price Index…measures the price of a specially selected collection of goods and services.… “a market basket” in a given year is compared to the price of the same collection of goods and services in a reference year.
3 GDP Deflator…measures the combined price of a particular collection of goods and services that make up the GDP (C, Ig, G, Xn).… helps to adjust the Nominal GDP to a Real GDP figure.
4 … reflects the current price level of goods and services NOMINAL GDP vs. REAL GDPNominal GDP… reflects the current price level of goods and services… ignores the effect of inflation on the growth of GDP.… this measure is called Current Dollar GDP.
5 NOMINAL GDP vs. REAL GDP Real GDP … measures the value of goods and services adjusted for change in the price level. It reflects the real change in output.… This measure is called Constant Dollar GDP… indicates what the GDP would be if the purchasing power of the dollar has not changed from what it was in a base year. The government currently uses 2000 as its base year for GDP Deflator.
6 NOMINAL GDP vs. REAL GDP GDP Price Index An Alternative Method x 100 = in a givenyear=Price of market basketin specific yearPrice of same marketbasket in base yearx 100Real GDP=Nominal GDPPrice Index(in hundredths)An Alternative MethodPrice Index(in hundredths)=Nominal GDPReal GDP
7 Nominal Values NOMINAL GDP vs. REAL GDP Deflate GDP when prices rise Inflate GDP when prices fallCalculating Real GDP12345781011$ 1020253028100200250-$ 501407080(2)PricePizzaPer Unit(1)Units ofOutputYear(3)Price IndexYear 1 =(4)Unadjusted,or Nominal,GDP,(1)x(2)(5)Adjusted,Or Real,GDP
8 28030012345781011$ 1020253028100200250$ 50140-7080(2)PricePizzaPer Unit(1)Units ofOutputYear(3)Price IndexYear 1 =(4)Unadjusted,or Nominal,GDP,(1)x(2)(5)Adjusted,Or Real,GDPYear 1 Base Year 100Year 2 $20/10 x 100 = 200Year 3 $25/10 x 100 = 250Price Indexin a givenyear=Price of market basketin specific yearPrice of same marketbasket in base yearx 100Year 4 $30/10 x 100 = 300Year 5 $28/10 x 100 = 280