# Real vs Nominal GDP: An Example

This lesson in economics explores the difference between real and nominal GDP using the example of gasoline production. The scenario presented is that during high school, the portion of GDP attributed to gasoline production was

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Slide1Real vs. Nominal GDPReal vs. Nominal GDP Unit Seven, Lesson Two  Economics Unit Seven, Lesson Two  Economics

Slide2An ExampleAn Example  When I was in high school the portion of GDP that was gasoline production was \$1.1 billion  Today, gasoline production is \$5.9 billion  Can we say we are producing \$4.8 billion more gasoline?  Why or why not?  When I was in high school the portion of GDP that was gasoline production was \$1.1 billion  Today, gasoline production is \$5.9 billion  Can we say we are producing \$4.8 billion more gasoline?  Why or why not?

Slide3Real vs. Nominal GDPReal vs. Nominal GDP  Prices change over time (this is called _______________________)  If GDP went up \$2 million from 1999 to 2003, did we ________________, or did prices just _____________?  Prices change over time (this is called _______________________)  If GDP went up \$2 million from 1999 to 2003, did we ________________, or did prices just _____________?

Slide4Real vs. Nominal GDPReal vs. Nominal GDP  ___________ GDP--GDP that doesn’t adjust for inflation  ___________ GDP--GDP adjusted for inflation We want to compare GDP of different years in _______GDP so we see how production has changed instead of how prices have changed.  ___________ GDP--GDP that doesn’t adjust for inflation  ___________ GDP--GDP adjusted for inflation We want to compare GDP of different years in _______GDP so we see how production has changed instead of how prices have changed.

Slide5Calculating Real GDPCalculating Real GDP Year (1) Units of Output (2) Price of Pizza per unit (3) Nominal GDP (1) x (2) (4) Real GDP  (use year 1’s price) 1 5 \$10 \$50 \$50 2 7 \$20 \$140 \$70 3 8 \$25 \$200 \$80 4 10 \$30 ? ? 5 11 \$28 ? ?

Slide6GDP DeflatorGDP Deflator  Nominal GDP--reflects _____ the ______ and the ____________ of goods and services  Real GDP--reflects only the ______________________  GDP Deflator--reflects only _________ of goods and services  Nominal GDP--reflects _____ the ______ and the ____________ of goods and services  Real GDP--reflects only the ______________________  GDP Deflator--reflects only _________ of goods and services

Slide7GDP DeflatorGDP Deflator  Calculating GDP Deflator: GDP Deflator =  Nominal GDP     x   100    Real GDP **deflator in base year will always equal 100  Calculating GDP Deflator: GDP Deflator =  Nominal GDP     x   100    Real GDP **deflator in base year will always equal 100