Final answer:
The GDP chain price index is a tool used to calculate real GDP by adjusting nominal GDP for inflation. To obtain real GDP, divide Nominal GDP by the price index (after converting it back to its decimal form by dividing by 100). This index helps differentiate actual economic growth from inflation-induced changes.
Step-by-step explanation:
The GDP chain price index is a measure that compares the current prices of goods and services produced in an economy to the prices of those same goods and services in a base year. The formula for calculating real GDP using the chain price index is as follows:
Real GDP = Nominal GDP ÷ (Price Index ÷ 100)
In the equation, the Nominal GDP represents the total value of all goods and services produced in the economy, calculated using the prices that are current in the year the GDP is measured. The Price Index is a decimal number reflecting the level of prices compared to a base year, typically multiplied by 100 to convert it into an easier-to-use integer. To find Real GDP, which adjusts for inflation and shows the true growth of the economy, divide the Nominal GDP by the Price Index (after dividing the index by 100 to adjust it to its original decimal format).
It's essential to understand that the GDP chain price index allows economists and policymakers to assess economic productivity and growth without the distortion of inflation. This price index normalizes the effects of price changes over time, leading to a more accurate real measure of economic change. By using the price index, you can get a better understanding of whether increases in GDP come from actual increases in output or simply from price changes.