# 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”

kewl

Nice

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

Aren't you assuming that the quality of apples are the same? Does that make a difference?

@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.

Great Stuff !!!

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.

@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.

@SalsaTiger83 Oh yes, thats what I was meaning (how its all black) but yep thats explained better.

@analyzingfunny Yep. Google "TiEmu"

@analyzingfunny yw 🙂

I would like to see a video on GDP vs GPI

i like it

PLEASE MAKE MORE MACRO ECON VIDEOS I NEED TO GET A GOOD GRADE IN THIS CLASS bengali 4 lyfeeee

What software are you using?

oohh, so my country's high GDP can be attributed by the rising prices-.-

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??

nice video

@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.

@MATH7660 you could use any photoshop or photoshop elements and then your tablet.

hey khan, can you do a video or 2 on 3d graphing basics please? thanks

y is this in yours microeconomics videos? this is macro

He is King Khan.

There is the sexy calculator!!! 😀

Playlist is titled "Microeconomics and Macroeconomics"

You know shits going down when sal pulls out his TI.

thank you.

there is no other like you

oh, you khan't be serious!

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.

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 😀

holy shit 720 streams faster than 360

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!

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.

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.

This is amazing!

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.

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

Finally understand it. Thanks

this is so rad

thank you so much I can understand more than my teacher explain me lol

@4:30 Why does 1200/.55 = 2181.8 not 218.18 ???

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

Wow, that was helpful, thanks!

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

Very nice way of explaining the concepts.

Makes this very easy to understand!! Thanks

@khan academy. How can I get that calculator you're using? And what is the name of it?

awsome

Exactly, what a awesome explanation. You are legend. Thank you very much.

Brain goes oooooooooh, thankyou!

Thank you! :)~:~

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

real help sir ~~

the axis should be switched: quantity as x and price as y

I am so much in debt to you for teaching me so much! 🙂

thanks you are really good at explaining the difference! i have a test tommorow fml

Thank you so much!! This is by far the best explanation of real GDP and nominal GDP!

I actually understand it… incredible! 😀

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.

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?

i wonder why we dont take gdp y2/inflation rate?

fe

This was extremely helpful!

great

I finally get it! Thank you Jesus!

bless ur kind soul. u are better than my prof lmao

I love this guy when I hear his voice I know am passing at least with an -A❤ much respect

This is fantastic. Thank you.

Awsummm explanatn sir

Thnk uhh soo much

Was really helpful

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??

Im not sure why, but that calculator made me laugh 😀

Thanks for your great explanation. You make it easier

awesome very good representation by graph

Really….this has become my last and ultimate resort to clear my concepts..thank u from core of my heart.

Thank you!

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?

Clear and concise. Thank you for explaining so well!

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.

Khan Bhai Thank you so much now I am cleared with Real and Nominal GDP.

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.

You lost me after apples

So why many countries GDP is much higher than GDP nominal?!

As you said GDP nominal should be higher…

i finally understand for real!

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

You legend brother

Thank you

i love khan academy

What are the answers

My problem is my teacher gave us a chart with no product or prices just a chart with a hundred numbers on it.