REAL VS NOMINAL GDP

Real GDP

- The value of output produces in constant base year prices. 

- It can increase if quantity increase. 

- We use real GDP to measure economic growth.

Nominal GDP

- The value of output produced in current prices. 

- It can increase from year to year if price and quantity increase. 

- It is used to measure inflation.

GDP Deflator

- It is a price index used to adjust from nominal to real GDP.

- Formula: (Nominal GDP/Real GDP) 100.

Consumer Price Index (CPI)

- It is the most commonly used measurement of inflation for consumers.

- Formula; (Current year/ Base year) 100.

Calculation For Inflation

- Formula: (GDP Deflator of current year - GDP Deflator/ GDP Deflator) 100.

Real Interest Rate

- Adjusted for inflation.

- Formula = Nominal interest rate - Inflation.

Nominal Interest Rate

- Not adjusted for inflation.