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Notes 20
′
.
Calculating real GDP and the inflation rate
Real GDP
Recall that real GDP is nominal GDP adjusted for inflation over time, and that real GDP is measured in constant dollars
while nominal GDP is measured in current dollars.
(Look this up in the text if this escapes you.)
To find real GDP, we need two numbers:
(1)
Nominal GDP for the year in question, and
(2)
The price index (PI) value for that year.
For the price index, we'll use the GDP deflator (actually, the GDP ChainType Index), which makes sense.
Here's the formula:
where
Y
t
=
real GDP for year t
G
D
P
t
=
nominal GDP for year t
P
I
t
=
price index for year t
t
=
whatever year you’re interested in working with
(Why do we multiply by 100 at the end?
Because price indexes are always expressed in percent terms, that is, multiplied
by 100.
Since we’re dividing by PI, it’s like dividing by 100 as well, so we have to “remultiply” by 100 to get it to come out
right.)
Now, this assumes that we want to express real GDP in terms of
base year
constant dollars, e.g., if the base year of the
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 Fall '09
 Staff
 Inflation

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