By the end of this section, you will be able to:

Contrast nominal GDP and real GDP
Explain GDP deflator
Calculate real GDP based on nominal GDP values

Future Value (FV) Formula is a financial terminology used to calculate the value of cash flow at a futuristic date as compared to the original receipt. The objective of this FV equation is to determine the future value of a prospective investment and whether the returns yield sufficient returns to factor in the time value of money. List of Economics Formulas. The term economics signifies how consumption, production, and distribution of goods and services happen in the nation. It further indicates how well the individuals and businesses determine the allocation of resources to derive maximum value addition. The formulas on economics can be elaborated basis the. Velocity of money = price level × real GDP money supply. And if we multiply both sides of this equation by the money supply, we get the quantity equation. An equation stating that the supply of money times the velocity of money equals nominal GDP., which is one of the most famous expressions in economics. The CPI can be used to index the real value of wages, salaries, pensions, and price regulation. It is one of the most closely watched national economic statistics. Consumer Price Index: The graph shows the consumer price index in the United States from 1913 – 2004. The real value is the value after adjusting for changes in inflation. To convert nominal economic data from several different years into real, inflation-adjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the measurements so that they are measured in the money prevailing in the base year.

When examining economic statistics, there is a crucial distinction worth emphasizing. The distinction is between nominal and real measurements, which refer to whether or not inflation has distorted a given statistic. Looking at economic statistics without considering inflation is like looking through a pair of binoculars and trying to guess how close something is: unless you know how strong the lenses are, you cannot guess the distance very accurately. Similarly, if you do not know the rate of inflation, it is difficult to figure out if a rise in GDP is due mainly to a rise in the overall level of prices or to a rise in quantities of goods produced. The nominal value of any economic statistic means the statistic is measured in terms of actual prices that exist at the time. The real value refers to the same statistic after it has been adjusted for inflation. Generally, it is the real value that is more important.

Converting Nominal to Real GDP

[link] 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. This data is also reflected in the graph shown in [link]

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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

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 twenty-seven over this time (that is, GDP of $14,958 billion in 2010 divided by GDP of $543 billion in 1960). This conclusion would be highly misleading. Recall that nominal GDP is defined 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. This can be easily done, using the GDP deflator.

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 they are computed in Inflation, but this definition will do in the context of this chapter. The data for the GDP deflator are given in [link] and shown graphically in [link].

[link] 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 apparent 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{array}{rcl} Value & = & Price × Quantity \\ or \\ Nominal GDP & = & GDP Deflator × Real GDP \end{array}

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{array}{rcl} Coolshirt's nominal revenue from sales \end{array}

Real Value Of Money Formula Economics