Question

Example: The nominal GDP is $100 billion and the real GDP is $80 billion. Calculate the GDP deflator.

Answer 1

Real GDP is calculated by dividing the Nominal GDP by the adjusted price index (Price Index / 100). An example calculation with a Nominal GDP of $600 billion and a price index of 20 results in a Real GDP of $3,000 billion.

Step-by-step explanation:

The calculation of Real GDP from Nominal GDP requires adjusting for the price level to measure the volume of production without the influence of price changes. The GDP deflator serves as a price index that reflects the average price level for all goods and services in the economy, making it possible to differentiate changes in real production from changes in prices.

Calculation Example

Using the provided formula:

• Real GDP = Nominal GDP / (Price Index / 100)

Let's say in 1965, the nominal GDP is $600 billion and the price index is 20. Then:

• First, adjust the price index: 20 / 100 = 0.20
• Next, divide the nominal GDP by the adjusted price index = $600 billion / 0.20 = $3,000 billion

This result represents the Real GDP for 1965.