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## AP®︎/College Macroeconomics

# Example calculating real GDP with a deflator

To use the GDP deflator to convert nominal GDP to real GDP, you can follow these steps:
1. Find the nominal GDP for the year you're interested in.
2. Find the GDP deflator for that year.
3. Divide the nominal GDP by the GDP deflator and multiply by 100. This will give you the real GDP.
Created by Sal Khan.

## Want to join the conversation?

- so basically real gdp is gdp adjusted for inflation?(41 votes)
- Nearly, but not exactly... It's adjusted for inflation in the prices of the products your country makes (i.e. that are calculated in your GDP). But when we're talking about inflation, usually it is calculated based on the price variation from a particular subset of products, some of which could be imported, and is more geared toward representing the increase in prices of products that are commonly consumed by households (food for instance). So if you hear that the inflation from year 1 to year 2 was 3%, the GDP deflator could vary slightly, because it is based on a different subset of products.(67 votes)

- What is the difference between Annual Inflation and "GDP Deflator" please?

Thanks.

Regards

Ravi(12 votes)- the "GDP deflator" is essentially the new price of all the goods and services of that year. Annual inflation is usually a percentage of the overall increase in cost of living and overall increase in the CPI. The "GDP Deflator" however is simply the new, complete price of all final good and services (whether it is inflated or deflated, or the same) compared to the base year.(12 votes)

- Is the deflator always in reference to 100?(2 votes)
- No, but it usually is. You pick some dollar value in time T1, and then calculate how much that is in time T2. Economists usually pick $100 in T1, but they could just as well pick $1.00, $1000 or any other number. The interesting number ends up being the ratio of the two numbers - or 1.025, since that is the number you would divide GDP in T2 by to see the real GDP in terms of T1 prices. This ration is the same no matter what number you pick in T1 ($100, $1, $1000 or whatever).(10 votes)

- In the previous video, GDP Deflator is defined as Ratio of P2/P1. The correction comment appears in video. Here the GDP deflator is shown as P2 and then we are dividing it by P1, which is the base year price. Is the deflator 102.5 or 1.025?

As per my understanding, GDP deflator is 1.025. Please clarify

World Bank shows the GDP deflator as P2/P1, which would be 1.025. Why is it more than 100 in the video?(5 votes)- So the CPI basically measures the changes in the price level of goods/services. As you know, this is all in comparison to a specific base year (in this case 2010). The value of the base year is arbitrarily valued 100. The GDP deflator is one of those numbers in the index and can be used to figure out the real GDP. If there is 2.5% inflation, then price level of 2011 in comparison to the 2010 price is 2.5% more right? So that's where the 102.5 price level comes from.

Real GDP = nominal GDP / GDP Deflator (the price level of 2011) x (100).

Sal reorganizes this equation in a logical form and writes Nominal / Real = 102.5 / 100. 1.025 really is the GDP deflator divided by 100, the base price level. As Sal says, it is 1.025 that really acts as the "deflator", but it isn't officially called so.

Hope that helped.

I've made some notes, please have a glance if you want: http://bit.ly/1PSnKT5 & http://bit.ly/1FHNJ82(1 vote)

- Is the deflator the same as the inflation or is it more complicated than that?(3 votes)
- Basically, there are a bunch of different ways that economists try to measure
**Inflation**. The**GDP Deflator**is one of those ways (the *Consumer Price Index is another way).(5 votes)

- i find this whole idea of GDP not realistic; for example the goods and services produced at the village level are not taken into account. i read in the newspapers that, the GDP in my country for a particular year say 2014 improved from that of 2013 while the common man continues to get poorer while the rich guys (including coys) continue getting richer and richer. how do you reconcile this?(3 votes)
- There are multiple people criticizing GDP. One important argument is that GDP doesn't tell the entire story: it doesn't take into account equality. So when a rich person produces an extra $20 of goods while a poor person produces $15 less, GDP will still rise by $5.

There are some other ways to calculate how big an economy is. One of the most famous alternatives is the Human Development Index. It looks at life expectancy, literacy, education, standards of living and quality of life. The Inequality-adjusted Human Development Index also takes into account equality.

More information: http://hdr.undp.org/en/content/inequality-adjusted-human-development-index-ihdi

Data: http://hdr.undp.org/en/content/table-3-inequality-adjusted-human-development-index(4 votes)

- At2:40, when Sal is starting to solve the Real GDP equation, why cannot we just multiply the Nominal GDP with the 100 and the divide the answer by 102.5 which should give us the same answer. Why do we need to multiply the both sides the way Sal does it?(2 votes)
- cause he eliminates the "real" term from the left hand side... but as you pointed out, it is easier to do as you said(cross multiply)..So i assume Sal was trying to explain it in lay man terms.(4 votes)

- My retirement $ ( from a 401K) is now in a savings account. How can I estimate the loss in purchasing power over the next 20 years ? ( I know it should be in stocks )(3 votes)
- So im just a tad confused here, the deflater is it always over 100 or... how do you find the that denominator?(2 votes)
- In some definitions of the deflator, it defines the deflator as "Nominal GDP/Real GDP x 100". However, Sal says in4:06that the deflator is "Nominal GDP/Real GDP" and that it would make more sense to divide by 100 in the end. What is the deflator then? And why all these differences in the definition?(1 vote)
- What is 115/100? Is it 1.15 or is it 115%? It's both of those, right? They are the same thing.

How did we get 115%? we did (115/100)*100%.

The index is just the percentage calculation, with the % sign removed. 115.(4 votes)

## Video transcript

Let's say the 2011 nominal GDP is: 15,294.3 billion dollars. And I didn't just make this number up. This is actually the advanced estimate of what 2011 GDP was in the fourth quarter. This is just a fourth quarter number. They took the fourth quarter number and they that analysed this to get to this 15 000 billion, which is esentially 15,294.3 trillion dollars of GDP. Let's say the GDP deflator, relative to 2010, you always have to know what you're taking your deflator relative to, is a 102.5 and this is, once again, the 2011 GDP deflator. And one way to interprate this is if the base year is 2010, that means that prices in 2010 could be viewed as being at 100 and that now, we're in 2011, we're in 102.5. Another way to think about is that generall level of prices, that we have talked about it, this is not an easy thing to measure But if attempted to that the generall level of prices has gone up by 2.5 %, when form 100 to 102.5. Now that is the way that we know the nominal GDP is, the GDP measured in 2011 dollars,ofen called the current dollar GDP. We know the deflator is, can we figure out the real GDP in 2011 and that will be the real GDP in 2010 dollars, when we have the deflator relative to 2010. So to do that we just have to remember that the ratio between our nominal GDP and our real GDP is going to be the ratio, you can viewed as current dollar vs. 2010 dollars. Or another way of viewing it, is the ratio between our deflator, which is 102.5 and 100, which is esentially you could use it as kind of deflator in 2010 or just setting that level of prices to be 100, a prices now are 102.5 . So taking it in that way, our nominal current dollar GDP is 15 294.3 billion dollars we can viewed that it's 15.2943 trillion, eiter way. Our real GDP is what we want to figure out. We do not know what it is. But we know the deflator, we know that things are gotten 102.5 more expensive or that deflator is a 102.5. And then we can just solve for the real GDP. And the 102.5 over 100, you might be able do this in your head, this whole expression right over here just becomes 1.025. And so you have this 15 trillions divided by 1.025 or you can divide both sides by 1.025 and multiply both sides by the real GDP. So let's do that. Multiply both sides by the real GDP, divide both sides by 1.025. Now, of course, this cancels with that, that why we have multiplay both sides by the real, And then this cancels with that and we get our real GDP. Our real GDP is equal to our current dollar GDP. 15 294.3 billion dollars divided by essentially the ratio between our deflator and the 100, divided by 1.025. If I were in charge of naming macroeconomic concepts I would actually made this the deflator I would set this at 1 and I would call this 1.205, because then you wouldn't had all this sillines multiplaing and dividing by 100. You just say: Hey, let's take our current dollar GDP, divide it by the deflator, I guess you could say world - deflated, to get the real GDP. That's just make a lot of sense to me. But either way, that's essencially what simplify too, this is our current dollar GDP, our nominal GDP dividing it by, what I would prefer to call the deflator, but you could use it as the deflator divided by 100 and that gave us a real GDP. We just deflating the current dollar one, and how many the calculate to figure this one out. So let's get the calculator out, so 15 294.3, this is in billions, divided by 1.025, gives us 14 921.3 So let me take this to the screen that I can remember that says. I have a bad memory. This is our real GDP, our real GDP is equal to 14 921.3 billion dollars. You can also write 14.9213 trillion dollars.