Nominal versus real GDP.a. Explain the difference between nominal and real GDP.b. Explain in detail, how to calculate real GDP, including the factors used in the calculation.Look in the notes to find this – very straight forward.You need to explain the CPI since it is used to make the conversion. c. Explain what you can do with real GDP that youcan’t do with nominal GDP and explain why not.

Question
Asked Oct 16, 2019
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Nominal versus real GDP.

a. Explain the difference between nominal and real GDP.

b. Explain in detail, how to calculate real GDP, including the factors used in the calculation.

    1. Look in the notes to find this – very straight forward.
    2. You need to explain the CPI since it is used to make the conversion.

 

c. Explain what you can do with real GDP that you

can’t do with nominal GDP and explain why not.

 

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Expert Answer

Step 1

a)

Nominal GDP includes both the growth and prices. Real GDP shows only the growth in the economy. Real GDP is calculated by dividing the nominal GDP by deflator. Therefore, nominal GDP is always greater than real GDP.

Step 2

Real GDP is calculated by the following formula:

Real GDP = Nominal GDP / Deflator

The CPI measures the weighted average of prices of a basket of goods and services. Th...

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