Suppose an economy produces three goods or services, Window Washing,

Baseballs, and Hammers. Data for the past three years can be found below:
2010
Products
Window
Washing
Baseballs
Hammers

2011

Prices
(in Rs)
50.00

Quantities

Quantities

90

Prices
(in Rs)
60.00

2.00

75

30.00

50

2012
Quantities

100

Price
(in Rs)
65.00

2.00

100

2.25

120

25.00

50

25.00

65

100

Nominal GDP:
Calculate Nominal GDP (The value of final goods and services evaluated at
current-year prices) for each year:

NGDP2010 = Q2010 x P2010

= (90 x 50.00) Window Washing
+ (75 x 2.00) Baseballs
+ (50 x 30.00) Hammers
= Rs 6,150

NGDP2011 = Q2011 x P2011

= (100 x 60.00) Window Washing
+ (100 x 2.00) Baseballs
+ (50 x 25.00) Hammers
= Rs 7,450

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 NGDP2012 = Q2012 x P2012

= (100 x 65.00) Window Washing
+ (120 x 2.25) Baseballs
+ (65 x 25.00) Hammers
= Rs 8,395

Real GDP:
Calculate Real GDP (The value of final goods and services evaluated at base-year
prices) for each year. For our example assume 2010 is the base year. This means
that all values are in what we call 2010 prices, or Constant prices.
By using the prices from the base-year, (or holding prices constant over time), we
eliminate the impact that rising prices have on GDP, to get a measure of Real
economic activity.

Real GDP in 2010

RGDP2010 = Q2010 x P2010
= (90 x 50.00) Window Washing
+ (75 x 2.00) Baseballs
+ (50 x 30.00) Hammers
= Rs 6,150
Note: For the Base-Year Nominal GDP always equals Real GDP

Real GDP in 2011

RGDP2011 = Q2011 x P2010
= (100 x 50.00) Window Washing
+ (100 x 2.00) Baseballs
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+ (50 x 30.00) Hammers

= Rs 6,700
Note: We use Current Quantities and Constant Prices.

Real GDP in 2012

RGDP2012 = Q2012 x P2010
= (100 x 50.00) Window Washing
+ (120 x 2.00) Baseballs
+ (65 x 30.00) Hammers
= Rs 7,190
Note: We still use Current Quantities and Constant Prices.

Nominal and Real Wages:

The nominal wage is the wage measured in money. The real wage is the nominal
wage in an economy adjusted for changes in purchasing power. It is defined as the
nominal wage divided by the general price level:
Real wage = Nominal wage
Price level

Real Wages (CPI Approach):

It's important to distinguish between nominal wages and real wages. If I am paid
by the hour, I am paid a nominal wage, which is simply the amount of money that
I earn per hour of labor. If I earn $20.00 per hour, my nominal wage is $20.00.
However, the nominal wage really doesn't tell me what my purchasing power is
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because the nominal wage isn't adjusted for inflation, which is a rise in the general
price level.
Your real wage, on the other hand, takes inflation into account.
Formula for Real Wages
The formula to calculate a real wage is relatively simple. Let's see how we can do
it with the consumer price index (CPI). The consumer price index is one of
several indexes of consumer goods and services that keep track of changes in the
price level. We can use this formula, along with the CPI, to calculate real wages:
Real Wage = (Nominal Wage * New CPI) / Old CPI
Example of Real Wage
Imagine that in 2010, your nominal wage was $18.00 per hour, and you received a
two percent pay increase in 2011, making your nominal wage $18.36 per hour. The
consumer price index for 2010, was 218.056 and in 2011 was 224.939. What was
your real wage?
Real Wage = (Nominal Wage * New CPI) / Old CPI
Real Wage = (18 * 224.939) / 218.056
Real Wage = 4,048.902 / 218.056
Real Wage = $18.57

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