Real vs. Nominal - Lecture notes Class notes PDF

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Real vs. Nominal - Lecture notes Class notes...

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Real vs. Nominal Nominal GDP  total value of production using current market process to determine the value of each unit that is produced Real GDP  total value of production using market process from a specific base year to determine the value of each unit that is produced The concept of real GDP growth lets us focus on the thing that we care the most about – how much the economy is producing at different points of time – without letting price movements muddy up the comparison GDP deflator  the measure of how prices of goods and services produced in a country have risen since the base year

GDP deflator =

Nominal GDP ∗100 RealGDP

Consumer Price Index (CPI)  related to the GDP deflator, but for a particular basket of goods or services

CPI=

Cost of buying a particular basket of consumer goods using year X prices ∗100 Cost of buying a particular basket of consumer goods using base year prices

The three key differences between CPI and GDP 1 GDP includes things that households don’t buy, like services provided by the government 2 CPI includes things that households purchase that are not included in the GDP, like import 3 Even if it is included in both baskets it is likely to have a different weight in the two Inflation rate  rate of increase in prices calculated as a year-over-year percentage

Inflationrate=

Price index year X −Price index previous year Price index previous year

Adjusting nominal variables: To see what ‘real money’ in 2003 is actually worth compared to 1909

Value ∈2013∈ dollars =

Priceindex∈2013 ∗Value ∈1909 dollars Priceindex∈1909...