What is the process to convert the nominal GDP rate into a real GDP rate?
1 Answer
Converting nominal GDP to real GDP requires dividing by the ratio of GDP deflators for the current and baseline years.
Explanation:
First, we don't measure GDP as a "rate". GDP is a flow of goods and services -- usually measured on an annualized basis (although tracked in shorter intervals, as well).
Nominal GDP is simply the total value of all final goods and services produced within an economy during a year, measured with prices from that particular year. Real GDP adjusts nominal GDP for the effects of inflation, or changes in the overall price level from year to year. To convert, we need to choose a baseline year. In the U.S., the Federal Reserve currently uses 2009 as the baseline year. Regardless, when we calculate real GDP, we express it in dollars for the baseline year.
So, current GDP in the U.S. (according to the Fed) is about $16.333 Trillion (estimated in Q2, 2015). That is, it is the equivalent of just over 16 trillion 2009 dollars. Because we have had some inflation (not a lot), 2009 dollars are actually worth more than 2015 dollars, so our nominal GDP is higher, about $17,9 Trillion in today's dollars.
To do the actual calculation, we would multiply current GDP by the ratio of the baseline GDP deflator (in this case, the GDP deflator for 2009) to the GDP deflator for the current year (in this case, the GDP deflator for 2015).
According to the Fed, the GDP deflator for 2015 is 109.674, and the GDP deflator for the basline year, 2009, is 100. (The Fed always sets the deflator of the baseline year to 100 for convenient comparisons, but you can use this methodology to compute real GDP in terms of dollars for any baseline year you choose.)
So, for 2015, Q2, the calculation simplifies to this:
GDP(real) = GDP(nominal) x 100/109.674.
Substituting 17,9137 for GDP(nominal), we get
GDP(real) = 17.9137/1.09674 = 16.333
(I rounded figures in the paragraphs above but included the precise figures from the Fed in the equation.)
