Question

1. When considering nominal vs real GDP, which one do economists calculate first. How do economists arrive at the final result? Given a particular year, what does it mean when the GDP deflator > 100? When the GDP deflator > 100, which is larger, nominal or real GDP? Which one, nominal or real GDP, do economists use to judge whether or not there has been growth?

Answer 1

Deflator is a value that allows data to be measured over time in terms of base period, so as to distinguish between changes in the prices from the base year. GDP deflator is used to measure the rise in the price level of domestic goods and services in the economy. Deflator higher than 100 means the price level in the economy has risen. when GDP deflator is higher than 100 than it means that nominal GDP has risen, whereas REal GDP only changes with change in output and not price.

The economists prefer Real GDP as perfect indicator for economic growth. Economic Growth is the increase in the output or production of goods and services in the country during a given period of time. It can also be defined as outward shift in Production Possibility Curve(PPC) which reflects increase in resources or production . Economic Growth is measured by GDP in Nominal or real terms. Nominal GDP is the current market value of all goods and services produced within the country during a given period of time whereas Real GDP is the inflation adjusted or constant value of all goods and services that are produced within the country.

Real GDP gives us true value of economic growth because it excludes inflation rate. Thus more output is only reflected in real GDP as it is adjusted for inflation.