Current and constant prices - HL ONLY
You need to be able to:
Calculate real GDP, using a price deflator.
The GDP deflator is a broad index of price increases than the consumer price index (CPI is the usual measure of inflation). It includes the prices of capital goods as well as consumer goods. It can be used to calculate real changes in the level of GDP. We say that it is used to convert GDP at current prices to GDP at constant prices (ie removes the fefect of inflation).
The following table show the GDP deflator indices for two countries, Italy and Turkey
The formula for the GDP deflator is as follows:
Hence to calculate Real GDP the formula can be rearranged as follows
- Calculate the increase in the overall level of price increases between 2000 and 2009 for both countries. This will give you a clue why nominal GDP has increased over the period.
- The table below shows the GDP figure at current prices in US $.
- For the above nominal GDP data calculate the real GDP and add it to a spreadsheet
- Plot the GDP at current prices (nominal) and the GDP at constant prices (real) for both countries between 2000 and 2009. Time should be plotted along the X axis.
- Are there any differences between the two graphs for each country?
- What accounts for the difference between the two sets of data?