Differentiate between real and nominal values. Specifically, be able to adjust nominal GDP data using a...

Differentiate between real and nominal values. Specifically, be able to adjust nominal GDP data using a price index to determine real GDP.

Expert Solution

Ans: The nominal values includes the effect of inflation while the real values does not take the effect of inflation.

The nominal GDP is also known as GDP at current year prices because the value of goods and services are calculated on the basis of current year prices. It takes the effect of inflation while calculating GDP.

The real GDP is also known as GDP at base year prices because the value of goods and services are calculated on the basis of base year prices. It does not take the effect of inflation while calculating GDP. It is inflation-adjusted GDP.

Example:

Country 'A' produces two goods, x and y, and the respective output and price index is given for two years:

Goods	Price in 2018 ($)	Output in 2018	Price in 2019 ($)	Output in 2019
Good X	2	10	4	20
Good Y	1	100	2	50

The base year is 2018.

Nominal GDP for 2019 = Price of 2019 * output in 2019

= $4*20 + $2*50

= $80 + $100

Nominal GDP for 2019 = $180

Real GDP for 2019 (base year prices of 2018) = Prices of 2018* Output in 2019

= $2*20 + $1+50

= $40 + $50

Real GDP for 2019 = $90

Rahul Sunny answered 2 years ago

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