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### Course: Macroeconomics>Unit 2

Lesson 6: Real vs. nominal GDP

# Example calculating real GDP with a deflator

To use the GDP deflator to convert nominal GDP to real GDP, you can follow these steps: 1. Find the nominal GDP for the year you're interested in. 2. Find the GDP deflator for that year. 3. Divide the nominal GDP by the GDP deflator and multiply by 100. This will give you the real GDP. Created by Sal Khan.

## Want to join the conversation?

• so basically real gdp is gdp adjusted for inflation?
• Nearly, but not exactly... It's adjusted for inflation in the prices of the products your country makes (i.e. that are calculated in your GDP). But when we're talking about inflation, usually it is calculated based on the price variation from a particular subset of products, some of which could be imported, and is more geared toward representing the increase in prices of products that are commonly consumed by households (food for instance). So if you hear that the inflation from year 1 to year 2 was 3%, the GDP deflator could vary slightly, because it is based on a different subset of products.
• What is the difference between Annual Inflation and "GDP Deflator" please?

Thanks.

Regards
Ravi
• the "GDP deflator" is essentially the new price of all the goods and services of that year. Annual inflation is usually a percentage of the overall increase in cost of living and overall increase in the CPI. The "GDP Deflator" however is simply the new, complete price of all final good and services (whether it is inflated or deflated, or the same) compared to the base year.
• Is the deflator always in reference to 100?
• No, but it usually is. You pick some dollar value in time T1, and then calculate how much that is in time T2. Economists usually pick \$100 in T1, but they could just as well pick \$1.00, \$1000 or any other number. The interesting number ends up being the ratio of the two numbers - or 1.025, since that is the number you would divide GDP in T2 by to see the real GDP in terms of T1 prices. This ration is the same no matter what number you pick in T1 (\$100, \$1, \$1000 or whatever).
• In the previous video, GDP Deflator is defined as Ratio of P2/P1. The correction comment appears in video. Here the GDP deflator is shown as P2 and then we are dividing it by P1, which is the base year price. Is the deflator 102.5 or 1.025?

As per my understanding, GDP deflator is 1.025. Please clarify

World Bank shows the GDP deflator as P2/P1, which would be 1.025. Why is it more than 100 in the video?
• So the CPI basically measures the changes in the price level of goods/services. As you know, this is all in comparison to a specific base year (in this case 2010). The value of the base year is arbitrarily valued 100. The GDP deflator is one of those numbers in the index and can be used to figure out the real GDP. If there is 2.5% inflation, then price level of 2011 in comparison to the 2010 price is 2.5% more right? So that's where the 102.5 price level comes from.

Real GDP = nominal GDP / GDP Deflator (the price level of 2011) x (100).

Sal reorganizes this equation in a logical form and writes Nominal / Real = 102.5 / 100. 1.025 really is the GDP deflator divided by 100, the base price level. As Sal says, it is 1.025 that really acts as the "deflator", but it isn't officially called so.

Hope that helped.

I've made some notes, please have a glance if you want: http://bit.ly/1PSnKT5 & http://bit.ly/1FHNJ82
(1 vote)
• Is the deflator the same as the inflation or is it more complicated than that?
• Basically, there are a bunch of different ways that economists try to measure Inflation. The GDP Deflator is one of those ways (the *Consumer Price Index is another way).
• i find this whole idea of GDP not realistic; for example the goods and services produced at the village level are not taken into account. i read in the newspapers that, the GDP in my country for a particular year say 2014 improved from that of 2013 while the common man continues to get poorer while the rich guys (including coys) continue getting richer and richer. how do you reconcile this?
• At , when Sal is starting to solve the Real GDP equation, why cannot we just multiply the Nominal GDP with the 100 and the divide the answer by 102.5 which should give us the same answer. Why do we need to multiply the both sides the way Sal does it?
• cause he eliminates the "real" term from the left hand side... but as you pointed out, it is easier to do as you said(cross multiply)..So i assume Sal was trying to explain it in lay man terms.
• My retirement \$ ( from a 401K) is now in a savings account. How can I estimate the loss in purchasing power over the next 20 years ? ( I know it should be in stocks )