Nominal growth can reflect higher prices without more production.
Nominal GDP values production at current prices. Real GDP removes the effect of price changes so that output can be compared over time. When interpreting a supplied real series, do not adjust it for inflation a second time. CPI measures consumer prices; it is not the general deflator for all domestic production.
- Nominal and real
- Nominal GDP values production at current prices. Real GDP removes the effect of price changes, so a rise describes more output rather than simply higher prices.
- Read an index
- An index expresses a measure relative to a base period, usually set to 100. An output index of 120 is 20% above that base; it is not a currency value.
- Watch for this
- A real series is already adjusted for prices. Do not subtract inflation again.
Do not mix price measures
GDP prices
The GDP deflator is a price index for domestically produced final output. The Consumer Price Index (CPI) covers a representative basket of consumer purchases, including imported goods. The two measures cover different things.
Supplied real figures
Deflating means removing the effect of price changes. Use a supplied real series directly. The syllabus requires interpretation of nominal and real measures, not calculation of national income.
Base-year interpretation
A real output index of 115 means output is 15% above its own base-year level. It does not identify the currency value or the price level.
| Scenario | Nominal GDP | GDP deflator | Real GDP | Population | Real GDP per capita |
|---|---|---|---|---|---|
| Base | 100 | 100 | 100 | 100 | 100 |
| A | 120 | 120 | 100 | 110 | 90.9 |
| B | 126 | 105 | 120 | 110 | 109.1 |
Worked example: A rise entirely explained by prices
The data office reports nominal GDP index 120, a GDP price index of 120 and real GDP index 100, all relative to the same base year of 100.
- Nominal GDP is 20% above its base-year value.
- The supplied real GDP index remains 100: output volume is unchanged.
- The nominal increase therefore does not establish a larger volume of production.
Watch out for this
Nominal GDP grew 20%, so people have 20% more goods.
Check the real series. Prices and quantities can both change nominal GDP.
Check your understanding
Real GDP is reported to grow 3% while consumer-price inflation is 2%. What does the real GDP figure mean?
- Output grew only 1% because inflation must be subtracted again.
- Consumer prices fell 3%.
- The volume of domestic production grew 3%.