Gross Domestic Product (gdp)

To measure the production of the economy we need to combine an array of goods and services. We combine from new cars to basketball games. The goal is to summarize the total production of the entire economy into a single number this number is called the gross domestic product or (GDP). There are two different types of GDP the two types are real GDP and nominal GDP. In this example we are going to use CDs and Tennis Racquets for 2004 and 2005.

Real GDP: A measure of GDP that takes into account changes in prices.

Nominal GDP: Is when you use current prices measure GDP

Simply put GDP is what is used to measure growth in the economy. If GDP climbs at a steady rate it is called economic growth. In this paper we are going to focus on real GDP. To calculate real GDP you must begin by using constant or a base price. Nominal GDP would be using current year's quantities by current year's prices. This is an example of nominal GDP.

Yr 2004 nominal GDP = (100 CDs * 20) + (200 tennis racquets * 110) = $22,200.00

Yr 2005 nominal GDP = (120 CDs * 22) + (210 tennis racquets * 120) = $27,840.00

Calculate real GDP for 2004 and 2005 using 2004 prices. By what percent did GDP grow?

To calculate real GDP you multiply the quantity by the price for each good or service and add them together, with a base year. For this example we will use prices from 2004 as a base. Example ( quantity * price ) + ( quantity * price ) = GDP

Year 2004 real GDP = (100 CDs * 20) + (200 Tennis Racquets * 110) = $22,200.00

Year 2005 real GDP = (120 CDs * 20) + (210 Tennis Racquets * 110) = $25,500.00

As you can see the GDP for 2004 is $22,200.00 and $25,500.00 for 2005. There is a slight growth in the GDP between the two years. To calculate the growth you must subtract the base year GDP form the second Year GDP and then divide the difference by The base year GDP

Example: (real GDP 2004 - real GDP 2005) / real GDP 2004 = % of growth

After doing the calculations we find that out growth is 14.8%.

($25,500.00 - $22,200.00) / $22,200.00 = 0.148 = 14.8%

That is how we calculate Real GDP and GDP growth.

Price index for 2005 using 2004 as a base.

To measure changes in the economy economist came up with an index called the GDP deflator, this index measures how prices change over time. To do so you set the base years index to 100 so for this example the base year would be 2004. we use the following formula to find the value of the deflator.

Value of deflator for 2005 = 100 * [(nominal GDP 2005) / (real GDP for 2005)

Since the value of the deflator is 109 in 2005 and was 100 in 2004. Using this formula we can see that prices rose by