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    Hiya,

    I have just started an economics module, and I need to explain differences between real GDP and nominal GDP between different years, using the GDP deflator. I have calculated growth rates and done the GDP deflator calculations, but I haven't a clue on how to show that nominal GDP does not give an accurate reflection of what is happening in an economy. Any tips/insights? Many thanks in advance!
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    (Original post by Kittiara)
    Hiya,

    I have just started an economics module, and I need to explain differences between real GDP and nominal GDP between different years, using the GDP deflator. I have calculated growth rates and done the GDP deflator calculations, but I haven't a clue on how to show that nominal GDP does not give an accurate reflection of what is happening in an economy. Any tips/insights? Many thanks in advance!
    You need to basically show that the nominal GDP is not accurate because of inflation. That's the point of using the deflator. The real GDP is the GDP once inflation has been accounted for.
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    (Original post by stochasticking)
    You need to basically show that the nominal GDP is not accurate because of inflation. That's the point of using the deflator. The real GDP is the GDP once inflation has been accounted for.
    Thanks! But what happens when you have deflation, and both the real GDP and nominal GDP growth rate falls, with the nominal GDP rate being affected by about double the percentage of real GDP? You'd think that with falling prices, people would consume more goods and services. You'd also think that as the nominal GDP incorporates price changes from one year to the next, the cheaper goods would somehow be reflected.

    Sorry, complete newbie here.
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    (Original post by Kittiara)
    Thanks! But what happens when you have deflation, and both the real GDP and nominal GDP growth rate falls, with the nominal GDP rate being affected by about double the percentage of real GDP? You'd think that with falling prices, people would consume more goods and services. You'd also think that as the nominal GDP incorporates price changes from one year to the next, the cheaper goods would somehow be reflected.

    Sorry, complete newbie here.
    Exact same rule applies just plug in the numbers lol.

    yes.

    Yes. The BOE uses the Consumer Price index (CPI) to measure inflation using a geometric average and sets a target for inflation of 1-3%.
 
 
 
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