Glossary
Base Year
A specific year chosen as a reference point for calculating real GDP and the GDP deflator, where prices are held constant to remove the effects of inflation.
Example:
When calculating real GDP for 2024, economists might use 2020 as the Base Year to compare output levels without price distortions.
GDP Deflator
A measure of the overall price level in an economy, calculated as the ratio of nominal GDP to real GDP, multiplied by 100.
Example:
If a country's nominal GDP is 8 trillion, the GDP Deflator would be 125, indicating a 25% increase in the price level since the base year.
Inflation Rate
The percentage increase in the overall price level of goods and services in an economy over a period, often calculated using the GDP deflator.
Example:
If the GDP deflator rises from 120 to 126 in a year, the Inflation Rate for that period is 5%, indicating a general rise in prices.
Nominal GDP
The total value of all goods and services produced in an economy within a specific period, calculated using the current prices of that period.
Example:
If a country produced 100 cars at 2,000,000 for that year.
Real GDP
A measure of economic output that adjusts for inflation, reflecting the actual volume of goods and services produced by valuing them at constant base year prices.
Example:
Even if a country's car production stayed at 100 units but prices rose, calculating Real GDP using 2020 prices would show no actual growth in car output.