Nominal GDP Formula

Introduction: What is GDP?

Gross Domestic Product or GDP is the monetary value of all goods and services produced in a nation within a specified period of time, typically one year. Calculation of GDP is prepared on all final and finished goods. This is done to avoid double entry. That is why the value of final goods contributes to the measurement of GDP.

The value of GDP is usually measured yearly but in some instances, the value may be calculated quarterly as well. GDP is a comprehensive parameter to check the economic health of an economy. The value of GDP shows both the size of the economy and the growth of the economy. Therefore, it is one of the most important tools to judge the health of a nation’s economic progress.

What is Nominal GDP?

Nominal GDP is the total amount of the economic output produced in a nation in a year valued at the current market price. Nominal GDP does not take inflation into account. Moreover, nominal GDP is based on the current market prices of products.

The value of nominal GDP is higher because it considers the current market value of the goods and services, unlike the base year’s price in the case of real GDP. It is easy to calculate nominal GDP because we just need the current year’s data. Moreover, since inflation adjustment is not required, it becomes even simpler to calculate the value of nominal GDP.

Nominal GDP Formula

Economically, the final users of finished goods and services are categorized into three classes – businesses, households, and government. Therefore, a desirable way to measure the GDP includes these three sectors. The method is known as the expenditure method.

The formula for calculating the GDP in this method is −

$$\mathrm{GDP\:=\:Consumption\:+\:Investment\:+\:Government\:spending\:+\:Net\:Export}$$

or

$$\mathrm{GDP\:=\:C\:+\:I\:+\:G\:+\:NX}$$

Where,

consumption (C) indicates private-consumption expenditures by nonprofit organizations and households,

investment (I) refers to home purchases by households and business expenditures by businesses,

government spending (G) indicates expenditures on goods and services by the government, and

net exports (NX) indicates the country’s exports minus its imports.

Understanding Nominal GDP

Nominal GDP is also called unadjusted GDP because it is not adjusted for the inflation occurring in the economy. It just shows the value of all finished goods and services that are produced within a geographical location in the time of one year. The value of commodities usually keeps changing depending on the number of items produced and the price of the commodities.

The value of all products and services (finished goods) must be taken to calculate the nominal GDP. Care must be taken not to include the prices of goods that are not the final products because this will lead to double entry of the goods. Nominal GDP is calculated using the current year’s prices which is the year of production of goods and services. Therefore, the market value of goods and services in a given year that is not adjusted for inflation is the nominal GDP of the economy for that given year.

Effect of Inflation on Nominal GDP

• Since nominal GDP is calculated at current market prices, the growth in the value of nominal GDP indicates that there is an increase in the price instead of the number of goods and services produced.

• A rise in inflation will hit the nominal GDP proportionally. That means, when inflation increases, the value of nominal GDP will go up.

In order to calculate the nominal GDP, the current year’s price is considered which is obtained from the consumer price index (CPI) of a basket of goods.

The value of nominal GDP is key to determining the Real GDP and GDP deflator which are described below.

Real GDP and GDP Deflator

Real GDP is the GDP that is inflation adjusted in comparison to the prices of goods and services of a base year. Therefore, it can be concluded that the inflation-adjusted nominal GDP and real GDP are identical.

It can be observed that if the price of products changes with change in the period and the total output remains the same, then there will be no change in the value of real GDP. If no inflation or deflation occurs in an economy over a few years’ time, then the values of nominal and real GDP will be the same.

The inflation in prices can be calculated using a term known as the GDP deflator.

$$\mathrm{GDP\:defiator\:=\:\lgroup\:\frac{Nominal\:GDP}{Real\:GDP}\rgroup\:\times\:100}$$

The GDP deflator is used as an Index that offers insight into inflation or deflation in an economy.

Key Takeaways

• Unregistered or unadjusted GDP which is also known as nominal GDP is the value of all finished goods and services that are produced within a geographical region in a specified period of time.

• If the prices change from one to the next period while the output remains constant, then the value of nominal GDP would change regardless of whether the output changes or not.

• Nominal GDP and real GDP will be the same if no inflation or deflation occurs.

• Real GDP is the GDP that is inflation adjusted in comparison to the prices of goods and services of a base year. Therefore, it can be concluded that the inflation- adjusted nominal GDP and real GDP are identical.

• It can be observed that if the price of products changes with change in the period and the total output remains the same, then there will be no change in the value of real GDP.

• If no inflation or deflation occurs in an economy over a few years’ time, then the values of nominal and real GDP will be the same.

• The inflation in prices can be calculated using a term known as the GDP deflator.

$$\mathrm{GDP\:defiator\:=\:\lgroup\:\frac{Nominal\:GDP}{Real\:GDP}\rgroup\:\times\:100}$$

• The GDP deflator is used as an Index that offers insight into inflation or deflation in an economy.

• The real GDP is a more popular and more accurate option to calculate the GDP of an economy.

Conclusion

The nominal GDP formula and nominal GDP are at the core of the calculation of the GDP of an economy. Since GDP is a very important indicator of the health of an economy, the nominal and Real GDP is very essential concepts one should be aware of. That is why learning about nominal GDP is so important in economics.

FAQs

Qns1.What is nominal GDP? What are its other names?

Ans. Unregistered or unadjusted GDP which is also known as nominal GDP is the value of all finished goods and services that are produced within a geographical region in a specified period of time.

Qns2.What is Real GDP in terms of nominal GDP?

Ans. The inflation-adjusted nominal GDP is the real GDP.

Qns3. How is the GDP deflator expressed?

Ans.

$$\mathrm{GDP\:defiator\:=\:\lgroup\:\frac{Nominal\:GDP}{Real\:GDP}\rgroup\:\times\:100}$$