Unit 2- Nominal GDP, Real GDP, Inflation and Interest Rates

Unit 2- Nominal GDP, Real GDP, Inflation and Interest Rates 

http://www.investopedia.com/video/play/nominal-vs-real-gdp/ (Copy and paste this link into your window browser) I really love this website because it gives every specific detail in simple words. You should really watch, or you'll miss out!

Nominal GDP: the value of output (quantity) produced in current year prices. 

(Can increase from year to year) if either output or prices increase. 

Real GDP: (adjusted for inflation) 

The value of output produced in constant or based year prices. (Doesn't change, however it can increase from year to hear only if the quantity increases.) 

 Formula for both: price x quantity 

Key Points: if we want to measure ECONOMIC GROWTH we will use Real GDP.

If we want to measure price increases (inflation) we will use Nominal GDP. 

GDP Deflator: Price index used to adjust from Nominal to Real GDP.

Formula: nominal GDP divided by real GDP (x) 100

-constant

-in the base year, GDP deflator = 100)

- years after the base year- GDP deflator is greater than 100

- years before the base year- GDP deflator is less than 100

CPI- Consumer Price Index - most commonly used measurement of inflation... 

Measures... The market basket of goods for typical urban American Family.

-Formula: price of a market basket of goods in the current year dived by price of a market basket of goods in the base year (x) 100

Inflation: - Formula: price in year 2 - price in year 1 divided by price index in year 1 (x) 100

Real versus Nominal Interest Rate

http://www.investopedia.com/video/play/interest-rates-nominal-and-real/ watch this amazing website on Real and Nominal Interest Rate. (The voice is entertaining so you won't be bored)

Real Interest Rate: 

-Adjusted for inhalation 

-Formula: nominal interest rate - inflation (your answer should be under 10)

-unanticipated inflation : not expected) 

- definition: the percentage increase in purchasing power, the borrower must pay the lender for a loan. Example: $50.00, purchasing power, you have to pay more than your borrow.

Nominal Interest Rate:

-percentage increase in the money the borrower must pay the lender (for a loan)

-not adjusted for inflation 

-Formula: anticipated inflation (fisher effect) - expected interest rate + inflation premium 

Unanticipated Inflation

Who's HURT versus who's HELPED by Inflation 

Who's HURT by inflation ~

| Savors

| Credit/Lendors

| People who are on a fixed income (elderly, welfare)

Who's HELPED by inflation •

| People who owe debt. (Debtors) 

Cola-Adjustment: is an automatic wage increase when inflation occurs. Example: New York and Califronia)