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Table shows U.S. GDP at five-year intervals since 1960 in nominal dollars; that is, GDP measured using the actual market prices prevailing in each stated year. Figure also reflects this data in a graph.

U.S. Nominal GDP and the GDP Deflator (Source: www.bea.gov)
Year	Nominal GDP (billions of dollars)	GDP Deflator (2005 = 100)
1960	543.3	19.0
1965	743.7	20.3
1970	1,075.9	24.8
1975	1,688.9	34.1
1980	2,862.5	48.3
1985	4,346.7	62.3
1990	5,979.6	72.7
1995	7,664.0	81.7
2000	10,289.7	89.0
2005	13,095.4	100.0
2010	14,958.3	110.0

We are given the Nominal Gross Domestic Product as $1.394 billion and average money circulation will be calculated per below: Average Circulation of Money can be calculated using the below formula as, The average amount of money per person in the economy x population of the country =411.00. Real Pricez = (Nominal Pricez) x (CPIbase year / CPIz) Here we use the nominal price of 1980 milk ($1.29) and adjust them to the 2000 dollars in order to allow me to directly compare them. Remember the data we have: Real Price of 1980 milk in year 2000 dollars =. Multiply the amount whose real value you want to calculate by this ratio. For example, if you want to find the real value in terms of 2008 dollars of $10,000 in 2018 dollars: $10,000 × 0.7258 = $7,258.

If an unwary analyst compared nominal GDP in 1960 to nominal GDP in 2010, it might appear that national output had risen by a factor of more than twenty-seven over this time (that is, GDP of $14,958 billion in 2010 divided by GDP of $543 billion in 1960 = 27.5). This conclusion would be highly misleading. Recall that we define nominal GDP as the quantity of every good or service produced multiplied by the price at which it was sold, summed up for all goods and services. In order to see how much production has actually increased, we need to extract the effects of higher prices on nominal GDP. We can easily accomplish this using the GDP deflator.

The GDP deflator is a price index measuring the average prices of all goods and services included in the economy. We explore price indices in detail and how we compute them in Inflation, but this definition will do in the context of this chapter. Table provides the GDP deflator data and Figure shows it graphically.

Figure shows that the price level has risen dramatically since 1960. The price level in 2010 was almost six times higher than in 1960 (the deflator for 2010 was 110 versus a level of 19 in 1960). Clearly, much of the growth in nominal GDP was due to inflation, not an actual change in the quantity of goods and services produced, in other words, not in real GDP. Recall that nominal GDP can rise for two reasons: an increase in output, and/or an increase in prices. What is needed is to extract the increase in prices from nominal GDP so as to measure only changes in output. After all, the dollars used to measure nominal GDP in 1960 are worth more than the inflated dollars of 1990—and the price index tells exactly how much more. This adjustment is easy to do if you understand that nominal measurements are in value terms, where

\begin{matrix} Value & = & Price × Quantity \\ or \\ Nominal GDP & = & GDP Deflator × Real GDP \end{matrix}

Let’s look at an example at the micro level. Suppose the t-shirt company, Coolshirts, sells 10 t-shirts at a price of $9 each.

\begin{matrix} Coolshirt's nominal revenue from sales & = & Price × Quantity \\ = & $9 × 10 \\ = & $90 \end{matrix}

Then,

\begin{matrix} Coolshirt's real income & = & \frac{Nominal revenue}{Price} \\ = & \frac{$90}{$9} \\ = & 10 \end{matrix}

In other words, when we compute “real” measurements we are trying to obtain actual quantities, in this case, 10 t-shirts.

With GDP, it is just a tiny bit more complicated. We start with the same formula as above:

\begin{matrix} Real GDP & = & \frac{Nominal GDP}{Price Index} \end{matrix}

For reasons that we will explain in more detail below, mathematically, a price index is a two-digit decimal number like 1.00 or 0.85 or 1.25. Because some people have trouble working with decimals, when the price index is published, it has traditionally been multiplied by 100 to get integer numbers like 100, 85, or 125. What this means is that when we “deflate” nominal figures to get real figures (by dividing the nominal by the price index). We also need to remember to divide the published price index by 100 to make the math work. Thus, the formula becomes:

\begin{matrix} Real GDP & = & \frac{Nominal GDP}{Price Index / 100} \end{matrix}

Now read the following Work It Out feature for more practice calculating real GDP.

Computing GDP

It is possible to use the data in Table to compute real GDP.

Step 1. Look at Table, to see that, in 1960, nominal GDP was $543.3 billion and the price index (GDP deflator) was 19.0.

Step 2. To calculate the real GDP in 1960, use the formula:

\begin{matrix} Real GDP & = & \frac{Nominal GDP}{Price Index / 100} \\ = & \frac{$543.3 billion}{19 / 100} \\ = & $2,859.5 billion \end{matrix}

We’ll do this in two parts to make it clear. First adjust the price index: 19 divided by 100 = 0.19. Then divide into nominal GDP: $543.3 billion / 0.19 = $2,859.5 billion.

Step 3. Use the same formula to calculate the real GDP in 1965.

\begin{matrix} Real GDP & = & \frac{Nominal GDP}{Price Index / 100} \\ = & \frac{$743.7 billion}{20.3 / 100} \\ = & $3,663.5 billion \end{matrix}

Step 4. Continue using this formula to calculate all of the real GDP values from 1960 through 2010. The calculations and the results are in Table.

Year	Nominal GDP (billions of dollars)	GDP Deflator (2005 = 100)	Calculations	Real GDP (billions of 2005 dollars)
1960	543.3	19.0	543.3 / (19.0/100)	2859.5
1965	743.7	20.3	743.7 / (20.3/100)	3663.5
1970	1075.9	24.8	1,075.9 / (24.8/100)	4338.3
1975	1688.9	34.1	1,688.9 / (34.1/100)	4952.8
1980	2862.5	48.3	2,862.5 / (48.3/100)	5926.5
1985	4346.7	62.3	4,346.7 / (62.3/100)	6977.0
1990	5979.6	72.7	5,979.6 / (72.7/100)	8225.0
1995	7664.0	82.0	7,664 / (82.0/100)	9346.3
2000	10289.7	89.0	10,289.7 / (89.0/100)	11561.5
2005	13095.4	100.0	13,095.4 / (100.0/100)	13095.4
2010	14958.3	110.0

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