Price Index = 100 x (Nominal GDP/Real GDP)
Nominal GDP measures the value of output during a given year using the
prices prevailing during that year. Over time, the general level of
prices rise due to inflation, leading to an increase in nominal GDP
even if the volume of goods and services produced is unchanged.
Real GDP measures the value of output in two or more different years
by valuing the goods and services adjusted for inflation. For example,
if both the "nominal GDP" and price level doubled between 1995 and
2005, the "real GDP " would remain the same. For year over year GDP
growth, "real GDP" is usually used as it gives a more accurate view of
the economy.
Source : Wiki
The most common approach to measuring and understanding GDP is the
expenditure method:
GDP = consumption + investment + exports ? imports
Consumption and investment in this equation are the expenditure on
final goods and services. The exports minus imports part of the
equation (often called net exports) then adjusts this by subtracting
the part of this expenditure not produced domestically (the imports),
and adding back in domestic production not consumed at home (the
exports).
Economists (since Keynes) have preferred to split the general
consumption term into two parts; private consumption, and public
sector spending. Two advantages of dividing total consumption this way
in theoretical macroeconomics are:
* Private consumption is a central concern of welfare economics.
The private investment and trade portions of the economy are
ultimately directed (in mainstream economic models) to increases in
long-term private consumption.
* If separated from endogenous private consumption, Government
consumption can be treated as exogenous, so that different government
spending levels can be considered within a meaningful macroeconomic
framework.
Therefore GDP can be expressed as:
GDP = private consumption + government + investment + net exports
(or simply GDP = C + G + I + NX)
source: Wiki |