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The main indicators of the System of National Accounts reflect the results of economic activity for the year, expressed in prices of a given year and therefore are nominal. Nominal indicators do not allow for both cross-country comparisons (comparisons of levels of economic development in different countries in the same period of time) and intertemporal comparisons (comparisons of levels of economic development of the same country in different periods of time). The fact is that the value of nominal indicators is influenced by changes in the price level, i.e. inflationary processes. Such comparisons can only be made using real indicators (real production volume and real income level), expressed in unchanged prices
Therefore, a distinction is made between nominal and real indicators.
Nominal GDP(nominal GDP - Y N) - this is the GDP calculated at current prices(current prices), in prices of a given year. The value of nominal GDP is influenced by two factors: change in real output And change in price level.
To measure real GDP, it is necessary to “cleanse” nominal GDP of the effects of changes in the price level.
Real GDP(real GDP - Y R) - is GDP measured in comparable(constant prices), in base year prices. In this case, any year can be chosen as the base year, chronologically both earlier and later than the current one. The latter is used for historical comparisons (for example, to calculate real GDP in 1990 in 2000 prices - in which case 2000 would be the base year and 1990 the current year).
Real GDP formula:
Real GDP = Nominal GDP / General price level
Y R =Y N /P.
General price level(price level - R) is an aggregate indicator calculated as price index(price index).
The nominal GDP of any year, since it is calculated at current prices, is
Y t N =Σ p i t q i t ;
real GDP, calculated in base year prices, is equal to
Y t R =Σ p i 0 q i t .
Nominal GDP of the base year is equal to real GDP of the base year:
Y 0 N = Y 0 R =Σ p i 0 q i 0 .
The general price level in the base year is equal to one (accordingly, the price index is equal to 100%).
In the given formulas the index t denotes the current (given) year, and the index 0 is the base year, so p i t - prices of each type of goods included in the market basket in the current year, p i 0 - prices of each type of goods in the base year, q i t - quantity (weight) of each type of goods included in the market basket in the current year, a q i 0- quantity (weight) of these goods in the base year.
Both nominal and real GDP are calculated in monetary units(rubles, dollars, etc.).
If the percentage changes in nominal and real GDP and the general price level are known (and this is the inflation rate), then the relationship between these indicators is as follows:
Change in real GDP (%) = Change in nominal GDP (%) - Change in the general price level (in%),
∆Y R (in %) ≈ ∆Y N (in %) - ∆P (in %).
For example, if nominal GDP grew by 7% and the inflation rate was 4%, then real GDP grew by 3%. It should be borne in mind that this formula is applicable only at low rates of change - up to 10%, and primarily with very small changes in the general price level (low inflation). When solving problems, it is more correct to use the formula for the ratio of nominal and real GDP in general form.
Of the many types of price indices in macroeconomics, the consumer price index (CPI), producer price index (PPI), and GDP deflator are commonly used.
Consumer price index - CPI (consumer price index - CPI), calculated based on the cost of the market consumer basket, which includes the range of goods and services consumed by a typical urban family over the course of a year. In developed countries, the consumer basket includes 300-400 types of goods and services.
Producer Price Index - PPI (producer price index - PPI), calculated as cost of a basket of industrial goods(intermediate products) and includes, for example, 3200 items in the USA.
Both the consumer price index and the producer price index are statistically calculated as indexes with weights(volumes) base year those. How Laspeyres index (I L), since calculating these weights is a lengthy and expensive procedure and therefore is not carried out annually (usually once every five years):
CPI = I L =(Σ p i t q i 0 /Σ p i 0 q i 0) x 100%
GDP deflator (GDP deflator) is calculated based on the value of a market basket of all final goods and services produced in the economy during a year. Statistically, the GDP deflator acts as Paasche index (I Р)- index with weights(volumes) current year, since GDP is calculated every year:
GDP deflator = I P =(Σ p i t q i t /Σ p i 0 q i t) x 100%
Thus,
GDP deflator=(Nominal GDP / Real GDP) x 100%.
The base year GDP deflator calculated as a price index is equal to 100%, and as a price level it is equal to one.
As a rule, the CPI (if the set of goods included in the consumer market basket is large enough) and the GDP deflator are used to determine the general price level and inflation rate.
The differences between the CPI and the GDP deflator, in addition to the fact that different weights are used in their calculation (base year - for the CPI and current year - for the GDP deflator), are as follows:
The CPI is calculated based only on the prices of goods included in the consumer basket, while the GDP deflator takes into account all goods produced by the economy;
When calculating the CPI, imported consumer goods are also taken into account, and when determining the GDP deflator, only goods produced by the country's economy are taken into account;
Both the GDP deflator and the CPI can be used to determine the general price level and the rate of inflation, but the CPI also serves as the basis for calculating the rate of change in the cost of living and the poverty line and designing social security programs based on them.
Inflation rate (l) is equal to the ratio of the difference in the price level (for example, the GDP deflator) of the current and previous year to the price level of the previous year, expressed as a percentage:
π = (GDP deflator t - GDP deflator t -1)/GDP deflator t -1,
Where t- current year, and ( t - 1) - last year.
Rate of change in cost of living (φ) calculated similarly, but using the CPI:
φ = (CPI t - CPI t-1)/CPI t-1;
CPI overstates the general price level and the inflation rate, and the GDP deflator underestimates these indicators. This happens for two reasons:
first, the CPI underestimates structural shifts in consumption(the effect of replacing relatively more expensive goods with relatively cheaper ones), since it is calculated on the basis of the structure of the consumer basket of the base year, attributing it to the current year (for example, if oranges have become relatively more expensive by a given year, then consumers will increase the demand for tangerines and the structure of the consumer basket will change - the share (weight) of oranges in it will decrease, and the share (weight) of tangerines will increase. Meanwhile, this change will not be taken into account when calculating the CPI; the weight (the number of kilograms consumed per year relative to the more expensive oranges and relative to the cheaper tangerines) of the base year will be assigned to the current year. and the cost of the consumer basket will be artificially inflated. The GDP deflator overestimates structural changes in consumption (substitution effect), attributing the weight of the current year to the base year,
secondly, CPI ignores changes in prices of goods due to changes in their quality. The rise in prices for goods is considered as if in itself, and does not take into account that a higher price for a product may be associated with an increase in its quality. It is obvious that, for example, the price of an iron with vertical ironing is higher than the price of a regular iron, but in the consumer basket this product appears as simply an “iron”. Meanwhile, the GDP deflator overestimates this fact, attributing the quality of the current year's goods to the base year, and underestimates the level of inflation.
Since the CPI and the GDP deflator are not numerically the same, the “ideal” rate is sometimes used to calculate the rate of the general price level (inflation rate). Fisher index, representing the geometric mean of the Laspeyres index and the Paasche index:
I F = √(I L x I P)
Depending on whether the general price level (usually measured using a deflator) has risen or fallen over the period of time between the base year and the current year, nominal GDP can be either greater or less than real GDP. If during this period the general price level increased, i.e. GDP deflator > 1, then real GDP will be less than nominal. In this case, an operation is performed deflation(decrease in the price level of the current year to the price level of the base year). If, during the period from the base year to the current year, the price level decreased, i.e. GDP deflator< 1, то реальный ВВП будет больше номинального. В этом случае проводится операция inflation(increasing the price level of the current year to the price level of the base year). Thus, inflation and deflation are essentially the same operation, allowing real GDP to be obtained from nominal GDP by dividing nominal GDP by a deflator, which can be greater than one (deflation) or less than one (inflation).
TOPIC 3. AGGREGATE DEMAND AND AGGREGATE SUPPLY (AD-AS MODEL)
We have already indicated that the volume of GDP, as well as all macroeconomic indicators related to it, is calculated in current prices at which created goods and services are sold. In this case, the value of nominal GDP is determined.
Nominal GDP
NOMINAL GDP is the value of goods produced expressed in current market prices. We also know that the output of an individual enterprise, industry and the entire national economy is expressed in prices that are formed on the market. But market prices do not remain unchanged. Currently, almost all countries are experiencing an increase to one degree or another in their overall level. For example, in 2011, consumer prices in Russia increased by 6.1%. Consequently, if GDP produced in different years is expressed in prices of the years in which it was produced, then data for a number of years will turn out to be incomparable. Meanwhile, there is often a need to study the dynamics of macroeconomic indicators.
Let’s assume that we need to determine by what percentage (in one direction or another) the physical volume of the country’s GDP has changed in a given year compared to the previous year. In this case, is it possible to compare the value of nominal GDP for these two years?
The nominal GDP indicator depends both on the volume of final goods and services produced in the country and on the price level for them. Naturally, it cannot serve to assess the dynamics (growth or reduction) of real production volume. Nominal GNP changes for two reasons. Firstly, the physical volume of output of goods changes, and secondly, market prices change. Let's say that if output did not change and all prices doubled, then nominal GNP would double, but this does not mean that the economy functioned better this year than in the previous year.
Let's assume that nominal GDP grew by 10% over the year. Does this mean that the country began to produce 10% more goods and services? This could only be stated if the price level for goods and services remained the same. But this practically never happens. Changes in prices lead to the fact that the same amount of nominal GDP can value a different mass of goods and services produced in physical terms. For example, a situation may arise that simultaneously with an increase in nominal GDP by 10%, prices increased by the same percentage. In this case, the nominally increased GDP of the next year (in monetary units) will embody the previous physical mass of goods and services.
In this regard, there is a need for a measure of GDP that would reflect only the dynamics of its physical volume, i.e., would be free from the influence of the price factor. This is possible only if the value of GDP for the comparable periods is measured in comparable (constant) prices prevailing in any year.
Real GDP
In order to separate changes in GDP due to changes in output from changes in GDP due to changes in prices, an indicator is introduced real GDP, which allows you to calculate the physical volume of the product produced in the country.
REAL GDP is the volume of output of all final goods and services expressed in constant (comparable) prices.
Since the real GDP indicator does not depend on price changes, it reflects the level and dynamics of the physical output of final goods and services, i.e., it can serve as an indicator reflecting the dynamics of economic development. The value of real GDP is directly related to nominal GDP and inversely related to the price index for all final goods and services produced in the country during the period under study, called the GDP deflator.
GDP DEFLATOR - price index for all final goods and services produced in the country during the period under study (Ip).
GDPreal = GDPnomin / Ip
Let us show with a vivid example how the nominal and real values of GDP changed during the period of rapid rise in prices in Russia from 1990 to 1996. During this period, nominal GDP grew from 644.2 billion rubles. in 1990 to 2,145,655.5 billion rubles, or 3330 times (!). If we remember that this period, when Russia had just begun to transition to a market economy, was accompanied by a catastrophic drop in production volumes and a decline in the living standards of the population, it immediately becomes obvious that the dynamics of national production cannot in any case be calculated using the indicator of nominal GDP. The above astronomical figure hides a rapid inflationary rise in prices. The GDP deflator for the specified period was expressed as 2430.2, which means an increase in prices by 24.3 times. If we calculate using the specified formula, we will see that real GDP (in 1991 prices) amounted to
Source: Economics. Fundamentals of economic theory: textbook for grades 10–11. for educational organizations. Advanced level: in 2 books. Book 2 // Edited by: Ivanov S. I., Linkov A. Ya. Publisher: Vita-Press, 2018 Nominal and real values in economics: examples The data that economists deal with when studying reality is divided into nominal and real values ( indicators). Why is the System of National Accounts needed? If you want to get information about the level of production and welfare in a particular country, the sectoral structure of its economy, and the price level, then be sure to refer to statistical data. What is Gross Domestic Product (GDP)? Gross domestic product is the market value of all final goods (material goods and services) produced in the territory of a given country over a certain period. What is Gross National Product (GNP)? The economy of any country is part of the world economy, and many firms invest their capital in foreign enterprises. How to calculate national income, personal income and disposable income GDP is an important economic indicator that most fully characterizes the volume of the final product produced by the state in a given period. GDP and quality of life Is it possible to measure the quality of life of people in a particular country using per capita GDP? Can we say that with an increase in the size of a country's GDP and national income, the population of any country always becomes more satisfied with the quality of their life? Reasons for the shortage of working capital in the manufacturing sector of the economy Long-term equilibrium real exchange rate What determines the real exchange rate
(No ratings yet)Table 3.
The GDP indicator does not give an accurate idea of the volume of products produced during the year, because Along with final goods and services, it also includes depreciation charges necessary to reimburse consumed capital (worn-out machinery and equipment). Therefore, the economy uses the net domestic product (NDP) indicator, which is determined by subtracting the amount of depreciation charges for the year from GDP.
The price index is the ratio of the market basket price in a given year to the market basket price in the base year multiplied by 100%.
If the price index is greater than one or greater than 100%, then inflation has occurred.
If the price index is less than one or less than 100%, then there is deflation, a decrease in prices.
If the price index is equal to one or 100%, then prices have not changed.
Real GDP = Nominal GDP / Price Index,% x 100%.
Real GDP shows the market value of each year's output, measured in constant prices.
Deflation- negative inflation - a decrease in the general price level due to a decrease in the money supply in circulation through the withdrawal of part of the excess paper money compared to the needs of monetary circulation. Deflation is a rare occurrence.
GDP is an important economic indicator that gives a general idea of the dynamics of economic development, the state of the economy as a whole, and allows one to compare the economic potential of different countries over certain periods of time. But to create an objective picture of the well-being of the population of a particular country, it is customary to correlate GDP with population size, calculating the volume of gross domestic product or national income per capita.
GDP per capita = GDP/population
If GDP grows faster than population, then welfare increases, and vice versa.
A state's GDP can be calculated in nominal and real terms. What are the specifics of both approaches to determining this economic indicator?
Facts about real GDP
Under real GDP refers to the cost of goods and services produced in the state, calculated adjusted for the deflator coefficient, as well as taking into account a number of other macroeconomic parameters that make it possible to determine the volume of GDP in current prices.
So, for example, if the country’s GDP in 2010 amounted to $1 trillion, and in 2011 - $1.5 trillion, despite the fact that prices in the state increased by 50%, then in real terms it will be close to zero.
Real GDP can be compared with another close macroeconomic indicator - GDP, calculated taking into account the purchasing power of the country's economy relative to other national economies. So, if 2 states produce the same volume of goods and services with different prices, then their GDP can be legitimately considered the same based on the purchasing power parity of their economies.
It can be noted that the volume of GDP at purchasing power parity is most often determined not in national, but in international currencies - usually in US dollars.
The advantage of calculating a state's real GDP is the ability to objectively compare the current volumes of its economy with the indicators of previous years and determine whether economic growth actually took place.
For example, Russia’s GDP grew approximately 8 times from 2000 to 2014. But taking into account inflation, its real growth is approximately twofold. In turn, in terms of purchasing power parity, Russia's GDP over the specified period of time increased approximately 3 times - this figure is quite close, therefore, to real GDP.
Facts about Nominal GDP
Under nominal GDP It is customary to understand the cost of goods and services produced in the state without taking into account any coefficients or adjustments for price increases. It can be expressed both in the national currency and in any of the foreign ones - at the current exchange rate of the Central Bank or currency exchanges.
Nominal GDP gives a very limited picture of the real size of the economy, as well as its actual growth. It will be informative mainly only in cases where the country has low or close to zero inflation.
A country's current nominal GDP typically differs significantly from GDP calculated using the economy's purchasing power parity. The fact is that he may not take into account the difference in the cost of the same goods produced by factories in different countries.
For example, Russia’s nominal GDP in 2015, taking into account the increased dollar exchange rate, amounted to about 1.2 trillion US dollars. But when calculated taking into account purchasing power parity, Russia's GDP in 2015 is determined to correspond to a much larger volume - about 3.5 trillion US dollars.
Comparison
The main difference between real GDP and nominal GDP is that when calculating the former, the deflator coefficient and other macroeconomic indicators are taken into account, which make it possible to objectively determine the actual volume of the economy and analyze the dynamics of its real growth. Nominal GDP is calculated without adjustments for any indicators.
Real GDP, to a greater extent than nominal GDP, correlates with GDP calculated taking into account the purchasing power parity of the state economy.
Having determined what the difference is between real GDP and nominal GDP, we record the conclusions in the table.
where is the price of the i-th product in the base year;
Volume of production of the i-th product in the base year.
Nominal GDP of the base year is equal to real GDP of the base year:
The general price level in the base year is equal to one (and the price index is correspondingly equal to 100%).
If the percentage changes in nominal real GDP and the general price level are known (and this is the inflation rate), then the ratio (in %) between these indicators is as follows:
Of the many types of price indices in macroeconomics, the following are usually used:
Consumer Price Index (CPI), calculated on the basis the cost of the market consumer basket, which includes the range of goods and services consumed by a typical urban family over the course of a year. In developed countries, the consumer basket includes 300-400 types of goods and services.
Let's consider the principle of constructing aggregate indices of quality indicators using the price index as an example.
If we need to identify changes in the prices of various products and goods or the quantities of goods and products, then it is necessary to bring a certain number of goods and products at certain prices to the total cost. To do this, we must measure the “weight” of each element (be it price or quantity of goods).
When reflecting changes in prices for goods, the quantity of goods will act as weights. If it is necessary to reflect a change in the quantity of goods, then prices will act as “scales”. But a problem arises: at what period level should we fix the weights (basic or reporting).
There are two ways to calculate price indices: Paasche and Laispeyres price indices.
This method suggests using base period weights. It was first introduced in 1864 by the economist E. Laspeyres.
Cost of products sold in the base (previous) period at prices of the reporting period
Actual cost of production in the base period
The Laspeyres price index shows how much prices have changed in the reporting period compared to the base period, but for goods sold in the base period. In other words, the Laspeyres price index shows how much the goods of the base period have risen or fallen in price due to price changes in the reporting period.
The Paasche price index is an aggregate price index with weights (quantity of goods sold) in the reporting period.
Actual cost of products of the reporting period
Cost of goods sold in the reporting period at prices of the base period
The Paasche price index characterizes the change in prices of the reporting period compared to the base price for goods sold in the reporting period. That is, the Paasche price index shows how much goods have become cheaper or more expensive.
The values of the Paasche and Laspeyres price indices for the same data do not coincide, since they have different economic content and therefore are used in different situations.
In domestic statistics, before the transition to market relations, preference was given to the Paasche price index. But due to the peculiarities of the calculation, starting in 1991, the calculation of the general level of prices for goods and services began to be carried out using the Laspeyres formula. This is due to the fact that during inflation or economic crises, many goods may fall out of consumption. When calculating according to the Paasche formula, goods for which demand has fallen are not taken into account, therefore, when calculating the price index according to the Paasche formula, frequent recalculation of information is necessary to form the correct system of weights. In this regard, in international practice they resorted to calculating price indices using the Laspeyres formula.
Fisher's ideal price index represents the geometric mean of the products of two aggregate price indices of Laspeyres and Paasche:
The ideal is that the index is reversible in time, that is, when rearranging the base and reporting periods, a reverse index is obtained (the reciprocal value of the original index).
The Fisher Price Index is devoid of any economic content. Due to the complexity of the calculation and the difficulty of economic interpretation, it is used quite rarely (for example, when calculating price indices over a long period of time to smooth out significant changes).
GDP deflator, calculated based on the value of the market basket of all final goods and services produced in the economy during the year. Statistically, the GDP deflator acts as Paasche index- index with weights (volumes) of the current year, since GDP is calculated every year:
GDP deflator =
Thus, the GDP deflator is the ratio of the nominal GDP of any year to the real GDP of that year:
GDP deflator = Y N /Y R .
The differences between the consumer price index and the GDP deflator are as follows:
The consumer price index is calculated based only on the prices of goods included in the consumer basket, while the GDP deflator takes into account all goods produced by the economy;
When calculating the CPI, imported consumer goods are also taken into account, and when determining the GDP deflator, only goods produced by the country's economy are taken into account;
Both the GDP deflator and the CPI can be used to determine the general price level and the rate of inflation, but the CPI also serves as the basis for calculating the rate of change in the cost of living and the “poverty line” and developing social security programs based on them;
The consumer price index overestimates the general price level and the inflation rate, while the GDP deflator underestimates these indicators. This happens for two reasons:
The consumer price index is underestimating structural shifts in consumption(the effect of substituting relatively more expensive goods with relatively cheaper ones), since it is calculated on the basis of the structure of the consumer basket of the base year, attributing it to the current year. As a result, the cost of the consumer basket turns out to be artificially high. The GDP deflator overestimates structural shifts in consumption by assigning current year weights to the base year;
Consumer Price Index Ignores changes in prices of goods due to changes in their quality. The rise in prices for goods is considered as if in itself, and does not take into account that a higher price for a product may be associated with an increase in its quality. Meanwhile, the GDP deflator overestimates this fact, attributing the quality of the current year's goods to the base year, and underestimates the level of inflation. Since the CPI and the GDP deflator are not numerically the same, to calculate the growth rate of the general price level (inflation level), the “ideal” Fisher index is sometimes used, which is the geometric mean of the Laspeyres index and the Paasche index:
I f = √I t x I p ,
Depending on whether the general price level P has increased or decreased over the period of time from the base year to the current year, nominal GDP can be either more or less than real GDP. If during this period the general price level increased, i.e., the GDP deflator > 1, real GDP will be less than nominal. If during the period from the base year to the current year the price level has decreased, i.e. the GDP deflator< 1, реальный ВВП будет больше номинального.
Consumer price index, like GDP deflator, can be calculated both in fractions of a unit and as a percentage.
