{"id":6865,"date":"2021-11-14T19:20:45","date_gmt":"2021-11-14T19:20:45","guid":{"rendered":"http:\/\/euseguros.pt\/?p=6865"},"modified":"2021-11-14T20:55:45","modified_gmt":"2021-11-14T20:55:45","slug":"nominal-gdp-vs-real-gdp-what-is-the-difference","status":"publish","type":"post","link":"https:\/\/euseguros.pt\/en\/nominal-gdp-vs-real-gdp-what-is-the-difference\/","title":{"rendered":"Nominal GDP vs Real GDP: what is the difference?"},"content":{"rendered":"<p>[et_pb_section fb_built=&#8221;1&#8243; _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;][et_pb_row _builder_version=&#8221;4.4.3&#8243;][et_pb_column type=&#8221;4_4&#8243; _builder_version=&#8221;4.4.3&#8243;][et_pb_text _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;]<\/p>\n<h3><strong>What is the Gross Domestic Product (GDP)?<\/strong><\/h3>\n<p>Gross domestic product (GDP) is the monetary value of the total output of a country. Both nationals and foreigners count: besides a national company, it can also be a foreign factory within a country &#8211; it is also counted.<\/p>\n<p>Not to be confused with GNP. Gross National Product (GNP) is everything produced by a country&#8217;s owned businesses, no matter if they are outside of the country&#8217;s borders. A good example is Japanese car factories situated everywhere in the world. This is counted in Japan&#8217;s GNP.<\/p>\n<p>GDP is the monetary value of the total output of everything that was produced within the borders of the country &#8211; foreign or national.<\/p>\n<p>[\/et_pb_text][et_pb_image src=&#8221;http:\/\/euseguros.pt\/wp-content\/uploads\/2021\/11\/188105.png&#8221; _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243; align=&#8221;center&#8221;][\/et_pb_image][et_pb_text _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;]<\/p>\n<h3><strong>How do we calculate the GDP?<\/strong><\/h3>\n<p>There are three ways of calculating the GDP:<\/p>\n<p><strong>1. Expenditure Approach<\/strong><\/p>\n<p><strong>2. Income Approach<\/strong><\/p>\n<p><strong>3. Production \/ Output Approach<\/strong><\/p>\n<p><span style=\"text-decoration: underline;\"><strong>Expenditure Approach<\/strong><\/span><\/p>\n<p>This is the most used way to measure GDP.<\/p>\n<p><strong>GDP =\u00a0 C + G + I + NX\u00a0<\/strong><\/p>\n<p><strong>C: Consumption, G: Government Spending, I: Investment, NX: Net Exports.<\/strong> The final value of the GDP is in the country&#8217;s currency.<\/p>\n<p>Consumption is literally all spending done by individuals: from a laptop, to groceries. It&#8217;s every single registered transaction from an individual fiscal number.<\/p>\n<p>Government Spending is what the government spend during the period on public infraestructures, wages, a fleet of cars for government officials.<\/p>\n<p>Investment spending is done by business: buildings, inventory and so on.<\/p>\n<p>Net Exports is the difference between X &#8211; Exports and M &#8211; Imports.<\/p>\n<p>If the country exports more than it imports, we way they run a rtade surplus. If the country imports more than it exports we say it is running a trade deficit.<\/p>\n<p>We can see the Net Exports balance on the Balance of Payments of a country.<\/p>\n<p><span style=\"text-decoration: underline;\"><strong>Income Approach<\/strong><\/span><\/p>\n<p><strong>GDP = National Income + Capital Consumption Allowance + Statistical Discrepancy<\/strong><\/p>\n<p><span style=\"text-decoration: underline;\"><strong>Production (Value Added) Approach<\/strong><\/span><\/p>\n<p>Here, the idea is to calculate an industry&#8217;s output and subtracting it intermediate goods and services consumption. A car company uses materials and service providers to produce its cars.<strong><\/strong><\/p>\n<p>So to measure the total output of the automotive industry we subtract its intermediate consumption.<\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;]<\/p>\n<h3><strong>What is the difference between Nominal GDP and Real GDP?<\/strong><\/h3>\n<p>[\/et_pb_text][et_pb_image src=&#8221;http:\/\/euseguros.pt\/wp-content\/uploads\/2021\/11\/Real-GDP-Formula-e1586618264227.png&#8221; _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;][\/et_pb_image][et_pb_text _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;]<\/p>\n<p>Now that we have an idea of what the GDP is, Economists use two ways of calculating it: the Nominal GDP and the Real GDP.<\/p>\n<p>The Real GDP is stripped from the inflation value using the GDP deflator.<\/p>\n<p><strong>So to summarize:<\/strong><\/p>\n<p>GDP is the monetary value of all final goods and services produced in a country&#8217;s borders within a certain period, usually one year.<\/p>\n<p><strong>Nominal GDP<\/strong> &#8211; measures this value using current prices and current year&#8217;s quantity of output.<\/p>\n<p><strong>Real GDP<\/strong> &#8211; measures this value using the prices of the base year and the current year&#8217;s quantity of output.<\/p>\n<p>[\/et_pb_text][et_pb_image src=&#8221;http:\/\/euseguros.pt\/wp-content\/uploads\/2021\/11\/Real-vs-Nominal-GDP.jpg&#8221; _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;][\/et_pb_image][et_pb_text _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;]<\/p>\n<p><strong>GDP Calculations<\/strong><\/p>\n<p>Both GDP calculations start off with the same base year:<\/p>\n<p>500 <span class=\"LrzXr kno-fv wHYlTd z8gr9e\">\u20ac x 100 + 1,000 \u20ac x 25 = 75,000\u20ac<\/span><\/p>\n<p><strong><span class=\"LrzXr kno-fv wHYlTd z8gr9e\">Nominal GDP Calculations<\/span><\/strong><\/p>\n<p><span class=\"LrzXr kno-fv wHYlTd z8gr9e\">Nominal GDP keeps going by row, meaning each year is the current price x current quantity:<\/span><\/p>\n<p><span class=\"LrzXr kno-fv wHYlTd z8gr9e\">2011: 520 \u20ac x 110 + 1,050 \u20ac x 30 = 88,700\u20ac<\/span><\/p>\n<p><span class=\"LrzXr kno-fv wHYlTd z8gr9e\">2012: 600 \u20ac x 112 + 1,075 \u20ac x 32 = 101,600\u20ac<\/span><\/p>\n<p><strong><span class=\"LrzXr kno-fv wHYlTd z8gr9e\">Real GDP Calculations<\/span><\/strong><\/p>\n<p><span class=\"LrzXr kno-fv wHYlTd z8gr9e\">Real GDP uses current year&#8217;s quantity but base year&#8217;s prices:<\/span><\/p>\n<p><span class=\"LrzXr kno-fv wHYlTd z8gr9e\">2011: 500 \u20ac x 110 + 1,000 \u20ac x 30 = 85,000\u20ac<\/span><\/p>\n<p><span class=\"LrzXr kno-fv wHYlTd z8gr9e\">2012: 500 \u20ac x 112 + 1,000 \u20ac x 32 = 88,000\u20ac<\/span><\/p>\n<p>[\/et_pb_text][et_pb_image src=&#8221;http:\/\/euseguros.pt\/wp-content\/uploads\/2021\/11\/Real-GDP.jpg&#8221; _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;][\/et_pb_image][et_pb_image src=&#8221;http:\/\/euseguros.pt\/wp-content\/uploads\/2021\/11\/Real-GDP2.jpg&#8221; _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;][\/et_pb_image][et_pb_text _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;]<\/p>\n<p><strong>GDP Deflator<\/strong><\/p>\n<p>To calculate de GDP deflator just divide the (Nominal GDP \/ Real GDP) x 100<\/p>\n<p>So let&#8217;s say you want to know the GDP deflator for the years 2012:<\/p>\n<p>Deflator 2012 = (101,600 \/ 88,000) x 100 = 115.45<\/p>\n<p>What does this mean?<\/p>\n<p>It means that if you had the Nominal GDP for the year 2012 and its deflator and wanted to know the Real GDP you would divide 101,600<span class=\"LrzXr kno-fv wHYlTd z8gr9e\">\u20ac<\/span> by the deflator 1.1545 to get the 88K<span class=\"LrzXr kno-fv wHYlTd z8gr9e\">\u20ac<\/span>.<\/p>\n<p>Notice that I took off the 100 that is usually multiplied to present the GDP. I used 1.1545 instead of 115.45<\/p>\n<p>Note also that since in the base year, the same year&#8217;s prices and same years quantity is used, when you divide the Nominal GDP by the Real GDP you get 100 as the deflator. <strong>So remember, the Deflator for the base year is always 100.<\/strong><\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.4.3&#8243; hover_enabled=&#8221;0&#8243;]<\/p>\n<h3><strong>GDP Inflation Rate<\/strong><\/h3>\n<p>Another thing we can do with the deflator is find out the GDP Inflation rate. Think about it: if the base year starts at 0, any increment after that will give you the inflation rate. <\/p>\n<p><strong>GDP Inflation Rate from 2010-2012 = (115.45-100) \/ 100 = 15.45%<\/strong><\/p>\n<p>[\/et_pb_text][\/et_pb_column][\/et_pb_row][et_pb_row _builder_version=&#8221;4.4.3&#8243;][et_pb_column type=&#8221;4_4&#8243; _builder_version=&#8221;4.4.3&#8243;][et_pb_signup provider=&#8221;aweber&#8221; aweber_list=&#8221;Subscribers|6133958&#8243; success_action=&#8221;redirect&#8221; success_redirect_url=&#8221;http:\/\/euseguros.pt\/novo-subscritor\/&#8221; title=&#8221;Subscribe to our newsletter&#8221; button_text=&#8221;SUBMIT&#8221; description=&#8221;<\/p>\n<p>Get important specialized information to help your business<\/p>\n<p>&#8221; _builder_version=&#8221;4.4.3&#8243; header_level=&#8221;h1&#8243; header_font=&#8221;||||||||&#8221; header_text_align=&#8221;center&#8221; header_font_size=&#8221;31px&#8221; body_font=&#8221;||||||||&#8221; body_text_align=&#8221;center&#8221; result_message_font=&#8221;||||||||&#8221; background_color=&#8221;#000000&#8243; custom_button=&#8221;on&#8221; button_bg_color=&#8221;#e02b20&#8243; button_font=&#8221;||||||||&#8221; max_width=&#8221;100%&#8221; button_letter_spacing_hover=&#8221;0&#8243; fields_text_shadow_style=&#8221;none&#8221; global_module=&#8221;557&#8243; saved_tabs=&#8221;all&#8221; button_text_size__hover_enabled=&#8221;off&#8221; button_one_text_size__hover_enabled=&#8221;off&#8221; button_two_text_size__hover_enabled=&#8221;off&#8221; button_text_color__hover_enabled=&#8221;off&#8221; button_one_text_color__hover_enabled=&#8221;off&#8221; button_two_text_color__hover_enabled=&#8221;off&#8221; button_border_width__hover_enabled=&#8221;off&#8221; button_one_border_width__hover_enabled=&#8221;off&#8221; button_two_border_width__hover_enabled=&#8221;off&#8221; button_border_color__hover_enabled=&#8221;off&#8221; button_one_border_color__hover_enabled=&#8221;off&#8221; button_two_border_color__hover_enabled=&#8221;off&#8221; button_border_radius__hover_enabled=&#8221;off&#8221; button_one_border_radius__hover_enabled=&#8221;off&#8221; button_two_border_radius__hover_enabled=&#8221;off&#8221; button_letter_spacing__hover_enabled=&#8221;on&#8221; button_letter_spacing__hover=&#8221;0&#8243; button_one_letter_spacing__hover_enabled=&#8221;off&#8221; button_two_letter_spacing__hover_enabled=&#8221;off&#8221; button_bg_color__hover_enabled=&#8221;off&#8221; button_one_bg_color__hover_enabled=&#8221;off&#8221; button_two_bg_color__hover_enabled=&#8221;off&#8221;][\/et_pb_signup][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>","protected":false},"excerpt":{"rendered":"<p>GDP &#8211; Gross Domestic Product is the total monetary value of all the finished goods and services produced from a country within a year.<\/p>","protected":false},"author":1,"featured_media":6866,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[152,172],"tags":[338,337,316],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v21.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Nominal GDP vs Real GDP: what is the difference? 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