David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

15.5 What GNP measures
Table 15.4
Nominal and real GNP
Quantity
Price £
Value in current £
Value in 1 980 £
apples
-
chickens
apples
chickens
apples
chickens
Nominal GNP
apples
chickens
Real GNP
1980 2010
100 1 50
100 140
2 4
4 6
200 600
400 840
600 1440
200 300
400 560
600 860
Table 15.5 UK GNP, 1960-2008
Nominal GNP (current £bn)
GNP deflator (1 995 = 100)
Real GNP (£bn, 1995 prices)
Source: www.stotistics.gov.uk.
1960
25
8
316
1995 2008
750 1471
100 141
750 1043
Table 15.5 gives UK data over four decades. Nominal GNP in the UK rose from £25 billion in 1960 to
£1471 billion in 2008. Without knowing what happened to the price of goods in general, we cannot judge
what happened to the quantity of output over the period. The second row of Table 15.5 answers this
question. On average, prices in 2008 were 41 per cent higher than in 1995. Hence, the change in real GNP
was much smaller than the change in nominal GNP in the same period. Whenever inflation is not zero, it
is important to distinguish between nominal and real GNP.
The contrast is even more marked if we go back to 1960 since inflation rose steadily in the 1970s. Whereas
nominal GNP rose 50-fold between 1960 and 2008, real GNP only tripled. The rest of the growth in
nominal GNP simply reflected inflation.
Per capita real GNP
Real GNP is a simple measure of the real income of an economy. The annual percentage rise in real GNP
tells us how fast an economy is growing. Table 15.6 shows the average annual growth rate of real GNP in
three countries over two decades. The first column shows that the annual growth rate of real GNP during
1980-2008 was highest in Jordan and lowest in Denmark. Although this tells us about the growth of the
whole economy, we may be interested in a different question: what was happening to the standard of living
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