Real GDP and nominal GDP | GDP: Measuring national income | Macroeconomics | Khan Academy

Real GDP and nominal GDP | GDP: Measuring national income | Macroeconomics | Khan Academy

Let’s say we’re studying a
very small and oversimplified country that only
sells apples, and we measure the GDP in year one. And we measure
that GDP as $1,000. And all of that
is due to apples. And we also know that the price
of apples in year one was $0.50 a pound. So I’ll write it
as $0.50 per pound. And let’s say that now
year one has gone by and even year two has
gone by, and we’re able to measure the
GDP in year two. So the GDP in year
two is $1,200. And the price of apples in year
two, let’s just say it is $0.55 a pound. So my question to you is, GDP,
the whole point of measuring GDP, is measuring the
productivity of a country. I mean we are measuring
in terms of dollars, but we care more about
just the dollar amount. We really care is, was this
country more productive? And if it was more productive,
how much more productive was it? And if we just look at these
GDP numbers right over here, this $1,000 versus this
$1,200, it gives you the sense that– well, at least if you
just look at the numbers– $1,200 is 20%
larger than $1,000. So if you just look at those
numbers right over there, it looks like the
GDP grew by 20%. But is that an
accurate representation of the productivity
of this country? Did it actually
produce 20% more goods? And a big clue is looking
at this price here. Because some of
this GDP actually might have increased
just due to price. But that doesn’t actually make
the country more productive. The quantity, the extra
quantity of apples that the country
produces, is actually what adds to the
total productivity. One way to think
about it– Let me draw a little diagram over here. On this axis, I’ll do quantity. On this axis, I will do price. And P1, so if I want to figure
out the GDP in year one, I would have the price
of apples in year one– that’s the only good or service,
just to simplify things– times the quantity of
apples in year one. And then this right
over here, the area of this green rectangle,
would GDP in year one. And then GDP in year two would
be the price in year two. So we’re going to go
from $0.50 to $0.55. The price in year two times
the quantity in year two– we’ll assume some growth as
occurred– times the quantity in year two. And so GDP in year
two would be the area of this entire rectangle. And if we want to find
the difference between GDP in year two and
GDP in year one, it would be the difference in area. So it would be what I am shading
in, in blue right over here. And based on the numbers that
we went over right over here, the area that I’m
shading in, in blue– so the difference between GDP
in year two and GDP in year one, the area I’m shading
in blue– would be this 200, the 200 increment. So this area right over
here would be that 200. Now when you look
at it over here, you see that that
200, some of it is due to an
increase in quantity. But a lot of it is also due
to an increase in price. So if we really wanted to figure
out how much more productive the country got, and we still
want to measure GDP in dollars, maybe we can take
a measure of GDP that measures year two’s
GDP, but it does it in year one’s prices. So if we could
somehow multiply– if we could multiply year two’s
quantity by year one’s prices, then we would get this
rectangle right over here. And then the difference
between that and year one, would give us the incremental
GDP in year one prices due to quantity. And that’s what we care about. We care about
total productivity. When we’re thinking
about GDP one, we say how much more
productive did the country get? So let’s try to do it with
these numbers right over here. So we can figure
out quantity two, we could figure out the
quantity in year two just by dividing the
GDP by the price. Just by dividing this area
of the entire blue rectangle and dividing it by the price,
that will give us the quantity. So if we divide 1,200
divided by $0.55– let me get my calculator out. So if I do 1,200
divided by $0.55, this is my quantity of apples
and in pounds in year two. And I’ll just round it, 2,182. So this is 2,182. So the quantity in year
two is 2,182 pounds. So this is equal to that. And then I could multiply
this times the price. So this is this quantity. It’s 2,182 pounds. And then I could multiply it
times the price in year one at year one’s price. So I’m going to
multiply it times– P1 is equal to $0.50 a
pound, $0.50 per pound. And this will give me– so let
me just get my calculator out. I should be able to do
that one in my head. But let’s see 0.5. And I get 1,090. Obviously, I’ll
round it to 1,091. So this is equal to 1,091. And this is an
interesting number. So this is– you could view
this as year two’s GDP. In year– or adjusted for– I’ll
write it, adjusted for prices, or adjusted for price increases. Or you could say
in year one prices. And what’s useful about
this is, this says, look, if prices had remained
constant, this is what our GDP
would have gotten to. If prices did not
increase, our GDP would have gotten to this 1,091. 1,091 is this area that
I drew in pink here. And so now, you could say if
prices were held constant, the growth in GDP would
have been $91 not $200. So this area right over
here that I’m– actually, let me do it in a color. Let me do it in orange, maybe. This area right over
here, the actual growth, if prices were held constant,
would have been $91. We would have gone from
$1,000 of GDP to $1,091. So this right over
here, that area, is $91 of– and we could
even call it real growth. It really measures
the productivity. Now this gives us an
interesting, I guess, set of ideas. One idea is to just measure
your GDP in the current year’s dollars. So this was GDP measured
in year two’s dollars. It was year two GDP measured
in year two dollars, year two prices. So we could call that
year two’s nominal GDP. Nominal, in name. So it’s GDP in name,
in that year’s prices. But this right over
here, where we measured year two’s GDP, in some
base year’s prices– so it allows a real
comparison of how much did our productivity
actually increase. Our productivity
actually increased by 9%. We produced 9% more apples. This, we call real GDP. Because it gives you a
measure of real productivity. It tries to take
out price increases. What we’ll see in the
future, or we might not do it in an introductory
course, but in practice, it’s kind of hard
to really measure what the absolute– this was a
simple economy, where we only had one product. But if you have many, many,
many products– actually gazillions of products in a
real economy and the prices are adjusting and the
quantities are adjusting, it’s not so easy to figure
out how to adjust for price. But the folks running the
national income accounts do try to do this. So they get a sense of how much
was the actual real growth.

89 thoughts on “Real GDP and nominal GDP | GDP: Measuring national income | Macroeconomics | Khan Academy

  1. cheers, mate. makes total sense. Imo the real growth is the only thing that matters. Unfortunately ppl keep forgetting that.

  2. @cheddyrod this is a really simple example. we could also say its gdp depends on foreign relations, price of oil, UN regulations etc… this is a simplified example to help you understand the basics.

  3. I dont know if many people notice, but the fact that most of these videos are black makes them really small, the 720p version of this is only 14MB – crazy. My point is that it makes them easy to stream on low bandwidth plans.

  4. @NZSideways8 no, that's not because of black background. It's because the video compression tries to encode only the changes. In these screencasts of an image painting program, virtually nothing changes from frame to frame, making this extremely efficient. The codec mostly only has to update the area under the tablet pointer. The same would be true for images with solid white background or even photos in the background.

  5. if what you care about is the change in totoal quantity(the whole point o f nominal GDP), why don't you measure and compare the quantity in gross production of both years in the first place??

  6. @kaushiksays dude, this is what you would have to do in an economics course. It's meant to demonstrate a concept of one part of what would happen in the real world.

  7. Shooting for that A+ on the 1st year Macro Econ midterm tomorrow, and I'm a C student.

    Made possible by the one and only Khan.

  8. should be 2181 lb of apples, cause technically 0.8 of an apple isn't an entire apple sold.
    great video tho, keep up the good work 😀

  9. Thank you so much Kahn! You explained it so much better than my macro book. They want us to use some stupid price index shit which is confusing, thanks again mate!

  10. That measures inflation, and it is simple. It just asks you to see inflation as percentage. It is important. Real GDP and Nominal GDP and Index measures are 2 different things.

  11. As an economics teacher we, as do most economics textbooks, graph "P" on the "Y" axis and "Q" on the "X" axis – continuity is key for teaching economics.

  12. Mmmmm TI-85 Rom… Would it be accurate to measure this against the population?  In my mind it would be similar to an artificial interest gain in a bank account where that interest is actually lower than inflation in currency.  Say you made $50 one year on an account with $20,000, but inflation for that year was 1.7%.  Effectively, you've still lost money.  The point would be that even if production goes up, it could and probably does go down per capita. 

  13. Would this level of economics be considered (senior) high school/ first semester of Uni type of work?

  14. Nnnooow I'm starting to understand it better. Gonna watch the whole series so I can ace this test. Thank you as always.

  15. Wow thanks for explaining that, I have always wonder what's the difference between Nominal and Real GDP means

  16. Brilliant, thank you so much, made that a lot clearer 🙂 3 hours and a bit till my exam and been up all night 🙂

  17. I had an idea but some doubts. Your explanation solidified my understanding. Thanks a bunch for taking the time to make this video. I wish those who did not like "like" on the video would explain what they see wrong with this video.

  18. Let's say: if you want to assess the growth of productivity of a certain country during a period of time – use PPP GDP figures, BUT if you want to compare current productivity of say two countries against each other – use nominal GDP figures. Any opinions?

  19. Yeah but… how far back do we price adjust? From the first quarter that GDP was ever measured, like in the 1950s or whenever it was??

  20. So nominal=wealth ppp=quantity? So it means that if for example britain has a nominal gdp higher than russia but russia has a higher ppp gdp, britain is wealthier but russia is more productive?

  21. Please advise: What does it mean when we have a decrease in Nominal GDP and a increase in real GDP both compared the year before? Thank you.

  22. Is year 1 always the year in which the country was founded?
    How do you compare real GDPs from countries that were founded in different years? As more inflation would occur in 200 years than 50 years.

  23. just spent my last 5 weeks sleeping in and out in class and now my midterms test is in a week. this will save me from failing my macroeconomics class i know it

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