GDP RealandNominal GDP, GDP Deflator and Inflation

GDP

GDP: total market value of all final goods and services produced in a country's borders within a given year.

GNP: total market value of all final goods and services by citizens of that country of if its land or foreign land,

Included in GDP:

65% (C) - "Personal Consumption Expenditures"

17% (Ig) - "Gross Private Domestic Investment" (Factory Equipment/Maintenance, Construction of houses, unsold inventory of products built in a year)

20% (G) - "Government Spending"

-2% (Xn) - "Net Exports (exports - imports)

NOT Included in GDP:

1. Intermediate Goods - good requires further processing before ready for final use.
2. Used/Secondhand Goods - avoid double counting.
3. Purely Financial Transactions - (stocks) its not physical.
4. Illegal Activity - drugs
5. Unreported Business Activity - tips
6. Transfer Payments - (Public: Social Security), (Private: Scholarships)
7. Non Market Activity - volunteering, babysitting, work for oneself

2 Ways of Calculating GDP (Expenditure vs. Income Approach)

1. Expenditure Approach: add up all spending on final goods and services produced in a given year. (GDP = C + Ig + G +Xn)

2. Income Approach: add up all of the income that resulted from selling all final goods and services produced in a given year. (GDP = (W)Wages, (R)Rent, (I)Interest, (P)Profit)

Nominal and Real GDP

Nominal: value of output produced in current prices

Real: value of output produced in constant base-year prices

(Formula = Price * Quantity)

1. nominal can increase from year to year if either output of price increases
2. real GDP can increase from year to year ONLY if output increases
3. if you want to measure economic growth, use REAL GDP
4. if you want to measure price increases, use NOMINAL GDP
5. REAL GDP is adjusted for inflation (Uses BASE YEAR)
6. Base Year = Earliest year if not given.

Formulas 

• NDP/Net Domestic Product: (GDP - Depreciation)
• NNP/Net National Product: (GNP - Depreciation)
• GNP: (GDP + Net Foreign Factor Payment)
•  
• GDP Deflator & Inflation
• GDP Deflator: price index used to adjust from nominal to real GDP
• Formula = (Nominal / Real GDP) * 100
•  
• in base year, deflator will always = 100
• in years AFTER base year, GDP is GREATER than 100
• in years BEFORE base year, GDP is LESSER than 100
• Consumer Price Index (CPI): most commonly used measurement of inflation
• Formula = (Price of market basket in particular year / Price of same market in BASE year) * 100
•  
• Inflation: (GDP deflator in NEW or Current Year - GDP deflator in OLD Year / GDP deflator in OLD Year) * 100
•