Question

The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data.

Short answer

$$\begin{gathered} \mathit{R}\mathit{e}\mathit{a}\mathit{l}\mathbf{}\mathit{G}\mathit{D}\mathit{P}\mathbf{=}\frac{\mathbf{N}\mathbf{o}\mathbf{m}\mathbf{i}\mathbf{n}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{G}\mathbf{D}\mathbf{P}}{\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{}\mathbf{I}\mathbf{n}\mathbf{d}\mathbf{e}\mathbf{x}} \\ RealGD{P}_{1978}=\frac{2293.8}{40.40} \\ =\$56.777 \end{gathered}$$

Since the real GDP is lower than the nominal GDP, the nominal GDP is deflated.

Step-by-step solution

Real GDP in 1978

$$\begin{gathered} \mathit{R}\mathit{e}\mathit{a}\mathit{l}\mathbf{}\mathit{G}\mathit{D}\mathit{P}\mathbf{=}\frac{\mathbf{N}\mathbf{o}\mathbf{m}\mathbf{i}\mathbf{n}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{G}\mathbf{D}\mathbf{P}}{\mathbf{P}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{}\mathbf{I}\mathbf{n}\mathbf{d}\mathbf{e}\mathbf{x}} \\ RealGD{P}_{1978}=\frac{2293.8}{40.40} \\ =\$56.777 \end{gathered}$$

Since the real GDP is lower than the nominal GDP, the nominal GDP is deflated.

Real GDP in 1988

$$\begin{gathered} RealGD{P}_{1988}=\frac{5100.4}{66.98} \\ =\$76.148 \end{gathered}$$

The lower real GDP as compared to nominal GDP indicates that the nominal GDP is deflated.

Real GDP in 1998

$$\begin{gathered} RealGD{P}_{1998}=\frac{8793.5}{82.51} \\ =\$102.836 \end{gathered}$$

The comparative decrease in real GDP and nominal GDP shows that the nominal GDP is deflated.

Real GDP in 2008

$$\begin{gathered} RealGD{P}_{2008}=\frac{14,441.4}{108.48} \\ =\$133.125 \end{gathered}$$

The increase in price level lowers the real GDP from the nominal GDP value, proving that the nominal GDP is deflated.

Real GDP in 2018

$$\begin{gathered} RealGD{P}_{2018}=\frac{20,501}{128.59} \\ =\$159.429 \end{gathered}$$

The nominal GDP is deflating because the increasing price level lowers the real GDP.