# How does one calculate the nominal GDP for two (2) goods/services?

May 19, 2015

GDP consists in the sum of the monetary value of all goods and services produced in an economy during a certain period of time (usually a year).

In terms of prices (or values - but stick to the term "prices", it is clearer), one can have nominal and real ones.

Nominal prices refer to the current ones, that is, the prices of the current year. In more specific terms, nominal prices are based on the current year's prices. Real prices are based on one specific year's prices - which can be chosen deliberately with (usually) no problem for the analysis.

It is not good to use nominal prices because you inflate the GDP, as from one period to another the prices in an economy are subject to inflation (generalized and continuous increase in prices). Real prices do not include that, as they are based on a specific year's prices. To calculate the real GDP, for example, you need to obtain the GDP deflator (though really easy to calculate, it is available, for example, in databanks such as World Bank's and IMF's).

Ok, now that definitions have been properly acknowledged, in the case of a simplified model with two goods/services, you can calculate the nominal GDP by multiplying the price of the good and its quantity.

Let it be two goods, burgers (B) and fries (F) in an economy.

Consider the following

Year | ${Q}_{B}$ | ${P}_{B}$ | ${Q}_{F}$ | ${P}_{F}$ |
2013| $200$ | $8.5$| $500$ | $1.5$ |
2014| $190$ | $9.0$| $500$ | $1.6$ |
2015| $250$ | $9.2$| $600$ | $2.0$ |

Where $Q$ = quantity and $P$ = price.

The nominal GDP for each year is

Year2013: $\left(200 \cdot 8.5\right) + \left(500 \cdot 1.5\right) = 2 , 450$
Year2014: $\left(190 \cdot 9.0\right) + \left(500 \cdot 1.6\right) = 2 , 510$
Year2015: $\left(250 \cdot 9.2\right) + \left(600 \cdot 2\right) = 3 , 500$

Using the nominal values, you'll always overestimate your GDP.

How do you calculate the real GDP? You choose your base year and multiply every year's quantities by the prices in your base year. I could keep doing this, but let's give one last example: what is the GDP for those years in 2014's prices?

Year2013: $\left(200 \cdot \textcolor{g r e e n}{8.5}\right) + \left(500 \cdot \textcolor{g r e e n}{1.6}\right) = 2 , 500$
Year2014: $\left(190 \cdot \textcolor{g r e e n}{8.5}\right) + \left(500 \cdot \textcolor{g r e e n}{1.6}\right) = 2 , 415$
Year2015: $\left(250 \cdot \textcolor{g r e e n}{8.5}\right) + \left(600 \cdot \textcolor{g r e e n}{1.6}\right) = 3 , 085$

As we can see, the real GDP reflects the fall in production of burgers and the "stagnation" of the fries production in 2014 and assesses without exaggeration the increase in 2015's GDP.

Last, but not least, it is important to remark that for your base year, real GDP equals nominal GDP.