Nominal GDP Formula

The Nominal GDP is the total of all the services, finished products, and goods produced in a given year, which shall be stated at the current market prices. Thus, it is a measure of the total output within an economy.

The formula for the same represents the total monetary value for a particular time period, which may be a quarter or an year. However, there is no adjustment for inflation, which is the fluctuation in prices. It is an unadjusted data, reflecting changes in price and quantity and the overall condition of an economy.

The nominal GDP formula helps us to assess the GDP at the current market price. In other words, it helps in calculating what will be the the current value by subtracting the value of products and services during production from the total value of the same. It gives the monetary value without accounting for changes in prices, which is termed as inflation in an economy.

The nominal GDP formula macroeconomics is a guide in measuring how well or efficiently an economy is performing between two time periods. But since the formula does not consider the element of inflation, the result obtained may not reflect the actual picture in case the inflation is very high.

However, any increase or decrease in the nominal GDP figure can be due to change in both price and quantity of goods and services. Apart from this concept, another useful concept that economist and policy makers frequently use for economic assessment is real GDP, which takes into account the inflationary pressure.

The formula to calculate nominal GDP is

Nominal GDP = C + I + G + (E – M)

Where,

• C is the Private consumption
• I is the Gross Investment
• G is the Government Investment
• E is Exports
• M is Imports

We can also calculate nominal GDP formula using the GDP Deflator approach, whose formula is:

Nominal GDP = Real GDP x GDP Deflator

It is necessary to make the calculation using a base year for ease of comparison in this case The price of products and services of the base year is taken as a benchmark for comparing one year with another. The Deflator will show changes in price level or inflation because it denotes the differences between price from one year to the other.

We will study the above concept calculate nominal GDP formula in details and learn more about its effects and uses later in this article.

The calculation of nominal GDP and growth rate in nominal GDP formula can be done using three methods which are the expenditure method, income method, and production method.

• The one discussed above is the expenditure method, where all the expenses are spent on the domestic purchase of services and goods in a given year.
• In this method, we subtract imports and add up exports as the goods that have been exported have been produced in the nation, whereas the goods that are imported are produced elsewhere.
• The nominal GDP formula macroeconomics considers the current prices and growth compared to the previous year's GDP.

Therefore, in the calculation of growth rate in nominal GDP formula, we need to find out the value of all the elements used in the formula.

Let us try to understand the concept of nominal GDP formula with price index with the help of some suitable examples.

Example #1

KPL is a developing country, and the statistics department provides you with the below information. You are required to compute the nominal GDP of the country.

Solution

Below is given data for the calculation of nominal GDP.

• Private Consumption (C): 5000000.00
• Gross Investment (i): 6250000.00
• Government Investment (G): 5937500.00
• Imports (M): 4400000.00
• Exports (E): 4840000.00

Therefore, the calculation of nominal growth domestic product can be done as follows,

= 50,00,000 + 62,50,000 + 59,37,500 + (48,40,000 - 44,00,000)

Nominal growth domestic product will be - 

Nominal growth domestic product =  17627500

Hence, the Nominal growth domestic product of the country is  1,76,27,500

Example #2

The government of St. Marteen has self-declared itself as a different country and has separated itself with the . New ministers were appointed, including the Prime Minister of the country. It has been two years since this government was formed. The Prime Minister wants to gauge his performance as the nation has been doing economically and overall growth. He asks his finance minister to make a presentation in 2 weeks on the country's GDP.

The Finance Minister visited the statistician department and asked them to conduct a survey and other research to compute its GDP. After thorough research, the department gathers the following information:

• Private Consumption: 9000000.00
• Government Investment: 5000000.00
• Imports: 15000000.00
• Exports: 3000000.00
• Net Investment: $10,000,000.00
• Amortize Rate: 10%

Based on the above information, you are required to calculate the Nominal GDP of the country.

Solution

Here, this is a newly formed country and wants to know its growth so that one can judge when one compares the nominal growth domestic product with a similar nation.

We first need gross investment which can be calculated as 10,000,000 / (0.9 * 0.9) =  1,23,45,679.01 as it has been amortize for 2 years at rate of 10%.

Gross Investment in Year 1 will be - 

=10000000/(1-10%)

Gross Investment in Year 1 will be = 11111111.11

Gross Investment in Year 2 will be - 

=11111111.11/(1-10%)

Gross Investment in Year 2 will be - 12345679.01

Therefore, the calculation of nominal GDP can be done as follows,

=9000000+12345679.01+5000000+(3000000-15000000)

Nominal GDP will be - 

Nominal growth domestic product = 14345679.01

Hence, the Nominal growth of domestic product is  1,43,45,679.01

Example #3

Country SMS reviews its two years of performance by comparing what growth they have achieved compared to the previous year's GDP. The statistics department provides you with the below details for the two years. But, first, you must compute the GDP for both the years and calculate the growth in GDP in percentage compared to the previous year.    

Solution

We are given all the variants required for calculation, so we can use the formula below to calculate the nominal GDP.

Use the above information to calculate nominal GDP

Therefore, the calculation of nominal GDP for the previous year can be done as follows,

=1000000000+350000000+5000000000+2500000000-750000000

Nominal growth domestic product for the previous year will be -

Nominal growth domestic product = 8100000000

Therefore, the calculation of nominal GDP for the current year can be done as follows,

=1100000000+420000000+5100000000+2575000000-667500000

Nominal growth domestic product for the current year will be -

Nominal growth domestic product = 8527500000

To calculate the growth rate, we need to divide the difference between the current year GDP and the previous year GDP (which shall increase the value of GDP) and divide the result by the last year's GDP.

Growth Rate in GDP will be - 

= 852,75,00,000.00/8,10,00,00,000.00 - 1

Growth Rate in GDP = 5.28%

Hence, the growth rate compares to the base year is 5.28% growth.

The nominal growth domestic product is used to know how the nation has been and whether the country's GDP is increasing or decreasing. Hence, the concept is relatively easy to understand. However, nominal GDP is an absolute term that cannot be judged on a standalone basis. Further, nominal GDP also encompasses inflation. Hence, when one compares a year's nominal GDP with the previous year's nominal GDP, the growth figure could be misleading as it also includes inflation and growth rate, and hence one should use Real GDP while making a comparison.

Both are widely used methods of GDP calculation. But there are some differences in the methods as pointed out below:

• In case of the economy is facing significant inflationary pressure, the nominal GDP formula with price index will give an overstated figure which may not reflect the true picture of the economy. But that is not the case with the latter because it will be calculated after adjusting price rise, thus revealing a true state of the country.
• As per the formula also, the real GDP multiples the quantity of products and services in an economy with the prices of the base year, not the current year, which will have inflation in it. This is not the case with the former.  
• The real GDP is a better method of comparing the economy over multiple year compared to nominal GDP.