Real Gdp refers to the actual total amount of goods and services produced in a country, it is computed using a base year or a constant price over a period of time. Nominal Gdp refers to the total amount of goods and services produced in a country computed at current market prices over a period of time (Kroon, 2007).
Ordinarily, nominal Gdp is higher than real Gdp since it considers the effects of inflation, while Gdp does not account for changes in the price. The table below shows real and nominal Gdp for the four quarters in 2005 (Bureau of Economic Analysis, 2012).
In the first quarter of the year 2005, the real Gdp is higher than the nominal Gdp. This implies that the actual goods and services produced in the country either increased or remained stagnant but the price levels went down. This indicates that at that particular time, the economy was on a contracting trend. In the second quarter, the real Gdp was still higher but the economy began to recover since the margin between the real and the nominal Gdp was not as big as in quarter 1.
This shows that there was an increase in the price level and the economy was starting to regain. In the third and fourth quarter, nominal Gdp was higher than real Gdp. The figures above show that the economy was expanding since both real and nominal Gdp were increasing. However, the general increase in price levels was higher which accounts for higher nominal Gdp as compared to the real Gdp.
Gdp Deflator
According to Kroon 2007, Gdp deflator refers to “a measure of the current level of prices relative to the prices in the base year.” If the real Gdp increases but the price level is not affected, the increase in nominal Gdp will be accounted for by the increase in the number of goods and services produced.
In such a case, the Gdp deflator is constant since the nominal Gdp and the real Gdp move in the same direction. The increase in price levels without altering the amount of goods and services produced will increase the nominal Gdp which will result in an increase in the Gdp deflator. Gdp deflator is computed as shown below: Gdp deflator = (nominal Gdp/real Gdp)*100. The Gdp deflator for quarter four: (12,901.4 /12735.6) * 100=101.3%.
Under normal circumstances, the Gdp deflator is always 100% but if there is an increase in nominal Gdp, but no change in real Gdp, the Gdp deflator is higher than 100 %, as in the case presented above. This implies that there was a general price increase by 1.3% in quarter four.
Gdp Per Capita
Gdp per capita refers to Gdp expressed in terms of a nation’s population. To arrive at Gdp per capita, Gdp is divided by a nation’s population. Per capita income is used to measure a country’s wealth mainly for purposes of comparing it with other nations (Kroon, 2007). The U.S. population in 2005 was 296 million (The Population Reference Bureau, 2005). The figures used to get Gdp per capita as follows:
- Quarter 1: 12515 (billion)/296million= 42.23
- Quarter 2:12570.7(billion)/296 m= 42.46
- Quarter3:12670.5(billion)/296m= 42.80
- quarter4: 12735.6(billion)/296m= 43.02
The figures above show that Gdp per capita increased in every quarter by very small amounts. Figure 1 represents the Gdp per capita trend in that year as calculated above.
Gdp per capita income growth rate is computed as a comparison of two periods. In this case, the Gdp growth rate in quarter 4 was computed as follows: (Gdp in quarter 4 divide by Gdp in quarter 3) less 1. that is:( 43.02/42.80)-1=0.005 which is equivalent to 0.5% growth. A growth rate of 0.5% implies that for every person, Gdp grows by 0.5%.
Conclusion
Real Gdp refers to the total amount of goods and services produced in the country in a given time period calculated at constant prices. Nominal Gdp refers to the total amount of goods and services produced in a country computed at current market prices.
Reference List
Bureau of Economic Analysis (2012). U. S. Department of Commerce: Bureau of Economic Analysis. Web.
Kroon E. G. (2007). Macroeconomics the Easy Way. NY: Barron’s Educational Series.
National Income & Products. (2012). U. S. Department of Commerce: Bureau of Economic Analysis Web.
The Population Reference Bureau (2005). World Population Data Sheet. 2005. The Population Reference Bureau. Web.