What this lesson teaches
I can read real GDP, GNI, per-capita figures, unemployment rate, CPI, balance of trade, HDI and the Gini coefficient.
Syllabus 9570, 3.2.1(c). Standard of Living and Macroeconomics Indicators: Macroeconomic indicators; Indicators of economic performance include real Gross Domestic Product (GDP) or Gross National Income (GNI), real GDP or GNI per capita, unemployment rate, Consumer Price Index (CPI) and balance of trade; Human Development Index (HDI) as an indicator to reflect standard of living; Gini coefficient as an indicator to reflect income distribution
Make a guess
A country's nominal GDP rises 8% in a year. Prices rise 8% too. Did its people get more goods and services?
- Yes, 16% more, adding both rises together.
- No. Real GDP stayed about the same.
- Yes, 8% more, because GDP rose 8%.
Show the answer
No. Real GDP stayed about the same.
All of the rise in nominal GDP came from higher prices. The quantity of goods and services did not change.
Nominal GDP can rise just because prices rise; real GDP removes price changes to show changes in output.
Nominal GDP values output at current prices. It rises when more is produced, but also when prices go up.
Real GDP removes the effect of price changes, so it shows whether the quantity of goods and services has actually changed.
To compare living standards over time, always use real figures.
Real GDP is calculated using the GDP deflator, a price index for everything produced in the economy. Calculating it is not required, but you must be able to interpret it.
- Nominal
- At current prices.
- Real
- Price changes removed.
Worked example: A rise that is all prices
Compared with a base year of 100, nominal GDP is 120, the GDP price index is 120 and real GDP is 100.
- Nominal GDP rose 20%.
- Prices also rose 20%.
- So real GDP is unchanged: the economy produced the same quantity of goods and services.
- Material living standards have not improved on average.
Watch out for this
A rise in nominal GDP shows the economy produced more.
Nominal GDP can rise because of higher prices alone. Only real GDP shows a change in output.
Check your understanding
A headline says GDP hit a record high this year. Nominal GDP rose 4%, but the price level rose 6%. What is the best reading?
- Real GDP rose by about 10%, because both rises add to the value of output.
- Real GDP fell by about 2%, so the record comes from higher prices.
- Real GDP rose by about 4%, because a record nominal figure means more output.
Show the answer
Real GDP fell by about 2%, so the record comes from higher prices.
Right. Real growth is about nominal growth minus inflation: 4% - 6% = -2%. The economy produced less.