Earlier this semester we had this equation: real price of a good = (nominal pric

Question

Earlier this semester we had this equation: real price of a good = (nominal price of a good / CPI)·100. It takes a nominal price of a good and converts it into what the price would be in the base year of the CPI. We called it "deflating" as it takes inflation out of a nominal price. For example, in class, we took the nominal price of gas from 3/2006 (it was $2.41 and the CPI then was an even 200) and converted it to values of the base period of the CPI. This yielded a real price of $1.20.

Could you compute real GDP in the same way -- that is, use nominal GDP and the GDP deflator in a similar fashion? Hint: You'll need to manipulate the equation we used to calculate the GDP deflator.

Explanation / Answer

yes

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