Question

Show the arithmetic involved in computing nominal vs real gdp

Answer 1

To calculate Real GDP from Nominal GDP, divide the Nominal GDP by the price index (adjusted to decimal form by dividing by 100). In an example calculation, the Real GDP for 1960 is $2,859.5 billion when a Nominal GDP of $543.3 billion is divided by the price index of 0.19.

Step-by-step explanation:

To compute the Real GDP, we need to adjust the Nominal GDP for inflation. The calculation involves a price index, usually the GDP deflator, to provide a more accurate measure of economic growth.

Steps to Compute Real GDP

1. Obtain the Nominal GDP and the price index (GDP deflator). For instance, in 1960, the Nominal GDP was $543.3 billion, and the price index was 19.0.
2. Adjust the price index to its decimal form by dividing by 100. Therefore, 19.0 becomes 0.19.
3. Divide the Nominal GDP by the adjusted price index to get the Real GDP. Using the example, $543.3 billion divided by 0.19 yields a Real GDP of $2,859.5 billion.

By adjusting Nominal GDP to Real GDP, one can determine the actual economic growth by removing the effects of inflation.