Question

You are trying to explain to your friends the importance of using real GDP to measure economic health over time, but some of them still insist that nominal GDP is equally good. Use the data given below to show your friends the difference between real and nominal GDP.
Nominal GDP (millions of dollars)= $10,000
Price Level (GDP Deflector)= 92

Required:
What is real GDP given the nominal GDP and price level (GDP deflator)?

Answer 1

Answer: $10,869.57

Explanation:

The Nominal GDP is the total amount of final goods and services produced in a country within a period, usually a year. It is calculated using the current year's prices.

Real GDP adjusts the Nominal GDP for price changes by using the price level of a certain base year.

The GDP Deflator is the price level of the current year and can be useful in calculating how much the prices have risen or fallen from the prices of the base year.

The formula is;

(Nominal GDP/Real GDP)*100 = GDP Deflator

Making Real GDP the subject;

Real GDP = (Nominal GDP/GDP Deflator)*100

= (10,000/ 92) * 100

= $10,869.57