Nominal GDP (current) and Real GDP (constant)

- Examples of computations
- Theoretical
- Actual (psa.gov.ph)

DEFINITION OF TERMS:
Nominal GDP
- It measures the value of all commodities/services in an economy at current prices due to
inflation or deflation.
- Inflation is the rise in overall price level
- Deflation is the fall in the overall price level
Real GDP
- It measures the value of all commodities/services in an economy at constant prices of some
base year

EQUATIONS TO BE USED:
GDP Deflator
𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = ∗ 100
𝑟𝑒𝑎𝑙 𝐺𝐷𝑃

- calculates the implicit index of the price level for a year.

- A conversion factor that transforms real GDP into nominal GDP
- Only includes domestic goods and not anything imported
- Measures price and services
Consumer Price Index
- GDP deflator isn’t the only index measure for the price level.
- CPI differs in two important ways:
- It measures only the change in the prices of a “basket” goods consumed by a typical
household.
- It uses base year quantity rather than current year quantity in calculating the price level
index value.
- Includes anything bought by consumers including foreign goods.
- Measures onlu goods bought by consumers.
𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑏𝑎𝑠𝑘𝑒𝑡 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑖𝑒𝑠(𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑝𝑟𝑖𝑐𝑒)
𝐶𝑃𝐼 = ∗ 100
𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑏𝑎𝑠𝑘𝑒𝑡 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑖𝑒𝑠(𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑝𝑟𝑖𝑐𝑒)
Rate of Inflation or Deflation
To measure the inflation rate, the annual percentage change in the price level:
𝑃2 − 𝑃1
𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛/𝐷𝑒𝑓𝑙𝑎𝑡𝑖𝑜𝑛 = ∗ 100
𝑃1
The price level (P) of a country is measured by GDP Deflator or CPI

𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟2 − 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟1

𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛/𝐷𝑒𝑓𝑙𝑎𝑡𝑖𝑜𝑛 = ∗ 100
𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟1

*where GDP1=previous price, GDP2 = current price

𝐶𝑃𝐼2 − 𝐶𝑃𝐼1
𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛/𝐷𝑒𝑓𝑙𝑎𝑡𝑖𝑜𝑛 = ∗ 100
𝐶𝑃𝐼1
- If the percentage change over some period is positive (+), it is rate of inflation.
- If the percentage change on the other hand is negative (-), it is rate of deflation.
- *the higher the inflation rate → the lower is the value of money