Real Versus Nominal GDP
A. There are two possible reasons for total spending to rise from one year to the
next.
1. The economy may be producing a larger output of goods and services.
2. Goods and services could be selling at higher prices.
B. When studying GDP over time, economists would like to know if output has
changed (not prices).
C. Thus, economists measure real GDP by valuing output using a fixed set of prices.
D. A Numerical Example
1.