MacroeconomicsI_working_version (1)

Measuring Domestic Output, National Income 55
Social security contributions -732
Corporate income taxes -319
Undistributed corporate profits -149
Transfer payments 1424
Personal income (PI) $6874
Personal taxes -987
Disposable income (DI) $5887
6.4. Problem of Comparison: Real versus Nominal GDP
In the end of the chapter let’s explain the difference between two frequently used terms:
nominal and real GDP. Total output produced in a current year include the vast variety of
heterogeneous products (including services). To be able to measure it, money or nominal
values serve as a common denominator to get a meaningful total amount of production.
However, a problem of comparison of that output in different years is connected with that
modification. The comparison is useful only if the prices (value of money) in different
years do not change. Otherwise we wouldn’t know if the change in output is a result of
change in overall prices (inflation or deflation) or change in total produced quantity
(or both).
GDP is a price-times-quantity figure, which means that inflation or deflation may
complicate its measuring. To resolve this difficulty, we can deflate GDP for rising prices
and inflate it when prices are falling. The result of this modification is GDP adjusted for
price changes, which is called real GDP. Nominal GDP refers to unadjusted total output.
Another explanation may be used: real GDP is output valued at constant prices (baseyear
prices); nominal GDP is output valued at current prices.