important to distinguish between GDP increases that merely reflect higher prices from those that result from an expansion in the quantity of goods and services produced. Economists use a price index, the GDP deflator, to adjust the nominal GDP data for the impact of increases in the general level of prices through time. The GDP deflator is a measure of the general level of prices relative to a base year, which is assigned a value of 100. As prices rise relative to the base year, the GDP deflator will increase proportionally. The GDP deflator can be used along with nominal GDP to derive real GDP, which is GDP measured in dollars of constant purchasing power. Real GDP nets out the increase in nominal GDP that merely reflects an increase in the general level of prices. Real GDP in this time period (t) measured in terms of the price level of the base year, is equal to: Real GDPt = (Nominal GDPt) * 100 (GDP Deflatort) If prices are higher now than during the earlier base year, the ratio on the right will be less than one and it will adjust the current nominal GDP figure for the higher current level of prices compared to the earlier base year. Consider the GDP figures for the in 2005 and 2009. In 2009, the nominal GDP of the was $14,256 billion compared to only 12,638 billion in 2005. Thus nominal GDP was 12.8 percent higher in 2009 than 2005. However, a large portion of this increase in nominal GDP reflected inflation rather than an increase in real output. The GDP deflator, the price index that measures changes in the cost of all goods included in GDP, increased from 100.0 during the 2005 base year to 109.7702 in 2005. This indicates that prices rose by about 9.8 percent between 2005 and 2009 (109.7702 -100, expressed as a percentage). In order to derive the 2009 real GDP, the 2009 nominal GDP must be deflated for the higher general level of prices compared to 2005. Using the equation above, the 2009 nominal GDP of $14,256.3 billion is first multiplied by 100 and then divided by the GDP deflator of 109.7702. This yields a real GDP of $12.987.4 billion [($14,256.3 *100)/
important to distinguish between GDP increases that merely reflect higher prices from those that result from an expansion in the quantity of goods and services produced. Economists use a price index, the GDP deflator, to adjust the nominal GDP data for the impact of increases in the general level of prices through time. The GDP deflator is a measure of the general level of prices relative to a base year, which is assigned a value of 100. As prices rise relative to the base year, the GDP deflator will increase proportionally. The GDP deflator can be used along with nominal GDP to derive real GDP, which is GDP measured in dollars of constant purchasing power. Real GDP nets out the increase in nominal GDP that merely reflects an increase in the general level of prices. Real GDP in this time period (t) measured in terms of the price level of the base year, is equal to: Real GDPt = (Nominal GDPt) * 100 (GDP Deflatort) If prices are higher now than during the earlier base year, the ratio on the right will be less than one and it will adjust the current nominal GDP figure for the higher current level of prices compared to the earlier base year. Consider the GDP figures for the in 2005 and 2009. In 2009, the nominal GDP of the was $14,256 billion compared to only 12,638 billion in 2005. Thus nominal GDP was 12.8 percent higher in 2009 than 2005. However, a large portion of this increase in nominal GDP reflected inflation rather than an increase in real output. The GDP deflator, the price index that measures changes in the cost of all goods included in GDP, increased from 100.0 during the 2005 base year to 109.7702 in 2005. This indicates that prices rose by about 9.8 percent between 2005 and 2009 (109.7702 -100, expressed as a percentage). In order to derive the 2009 real GDP, the 2009 nominal GDP must be deflated for the higher general level of prices compared to 2005. Using the equation above, the 2009 nominal GDP of $14,256.3 billion is first multiplied by 100 and then divided by the GDP deflator of 109.7702. This yields a real GDP of $12.987.4 billion [($14,256.3 *100)/