Question 1

What is the difference between nominal and real GDP?

Accepted Answer

Nominal GDP measures economic output at current market prices, so it includes both changes in production and changes in prices. Real GDP adjusts for inflation by using constant base-year prices, isolating the actual change in production. If nominal GDP grows by 5% but inflation is 3%, real GDP growth is roughly 2%. Real GDP is the better measure for tracking whether an economy is actually growing.

Question 2

What is the GDP deflator and where do I find it?

Accepted Answer

The GDP deflator is a price index that covers all goods and services produced domestically. It is calculated as (Nominal GDP / Real GDP) x 100, with the base year set to 100. You can find it from the Bureau of Economic Analysis (BEA) at bea.gov, the World Bank, or the Federal Reserve Economic Data (FRED) database. The current base year used by the BEA is 2017.

Question 3

How is the GDP deflator different from CPI?

Accepted Answer

The GDP deflator and CPI both measure price changes, but they differ in scope and methodology. CPI tracks a fixed basket of consumer goods and services and includes imported goods. The GDP deflator covers all domestically produced goods and services (including business investment and government spending) and its basket changes as production patterns change. They often show similar trends but can diverge when import prices shift or the composition of output changes.

Question 4

Can real GDP be higher than nominal GDP?

Accepted Answer

Yes. When the GDP deflator is below 100, it means prices are lower than the base year, and real GDP will be higher than nominal GDP. This happens when looking at years before the base year. For example, if the base year is 2017, then 2010's real GDP (in 2017 dollars) will typically be higher than its nominal GDP because prices were lower in 2010 than in 2017.

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