Problem 1

Job No. 58 passes through three departments: X, Y, and Z. The following information is given
regarding this job:

Required: Calculate the cost of Job No. 58 from the above figures.

Solution

What Real Gross Domestic Product (Real GDP) Is, How to

Calculate It, vs. Nominal
By AKHILESH GANTI
 

Updated April 28, 2023

Reviewed by ERIC ESTEVEZ

Fact checked by 
PETE RATHBURN
Investopedia / Paige McLaughlin

What Is Real Gross Domestic Product (GDP)?

Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all
goods and services produced by an economy in a given year. Real GDP is expressed in base-year
prices. It is often referred to as constant-price GDP, inflation-corrected GDP, or constant-dollar
GDP. Put simply, real GDP measures the total economic output of a country and is adjusted for
changes in price.

KEY TAKEAWAYS

 Real gross domestic product is an inflation-adjusted measure that reflects the value of all goods
and services produced by an economy in a given year.
 It is expressed in base-year prices and is often referred to as constant price, inflation-corrected,
or constant dollar GDP.
 Real GDP makes comparing GDP more meaningful because it shows comparisons for both the
quantity and value of goods and services.
 Real GDP is calculated by dividing nominal GDP by a GDP deflator.
 Unlike real GDP, nominal GDP uses current market prices and doesn't factor inflation into its
calculation.
0 seconds of 2 minutes, 38 secondsVolume 75%
 
2:37
Nominal vs. Real GDP

Understanding Real GDP

Real GDP is a macroeconomic statistic that measures the value of the goods and services
produced by an economy in a specific period, adjusted for price changes, Essentially, it measures
a country's total economic output, taking price changes into account—whether they are due
to inflation or deflation.

Governments use both nominal and real GDP as metrics for analyzing economic growth
and purchasing power over time. This is done using the GDP price deflator (also called the
implicit price deflator), which measures the changes in prices for all of the goods and services
produced in an economy. To determine real GDP, economists take nominal GDP and adjust it for
price changes.

The Bureau of Economic Analysis (BEA) provides a quarterly report on GDP with headline data
statistics representing real GDP levels and real GDP growth.1 Nominal GDP is also included in
the BEA’s quarterly report under the name current dollar. Unlike nominal GDP, real GDP
accounts for changes in price levels and provides a more accurate figure of economic growth.2

2.6%
The U.S. real GDP growth rate (annualized) during the fourth quarter of 2022, versus a 3.2%
increase in the third quarter.3
Real GDP Calculation
Calculating real GDP is a complex process typically best provided by the BEA. In general,
calculating real GDP is done by dividing nominal GDP by the GDP deflator (R).

Real GDP=Nominal GDPRwhere:GDP=Gross domestic productR=GDP deflato
rReal GDP=RNominal GDPwhere:GDP=Gross domestic productR=GDP deflat
or
The BEA provides the deflator on a quarterly basis. The GDP deflator is a measurement of
inflation since a base year (currently 2017 for the BEA). Dividing the nominal GDP by the
deflator removes the effects of inflation.4

For example, if an economy's prices have increased by 1% since the base year, the deflating
number is 1.01. If nominal GDP was $1 million, then real GDP is calculated as $1,000,000 /
1.01, or $990,099.

What Is Nominal GDP?

As noted above, governments rely on both real and nominal GDP to get an idea of where the
economy is heading. While real GDP takes inflation (or deflation) into account, nominal GDP is
a macroeconomic assessment of the value of goods and services using current prices in its
measure. As such, nominal GDP is also referred to as the current dollar GDP.

Unlike nominal GDP measures how well the economy is doing without factoring in price
changes due to inflation or deflation. This means it may actually inflate growth because all of the
goods and services that are used to determine nominal GDP are valued at prices in the current
year.

The easiest way to calculate nominal GDP is by multiplying real GDP by the GDP deflator:

Nominal GDP=Real GDP×GDP DeflatorNominal GDP=Real GDP×GDP Deflat
or
You can also calculate it using the expenditure method:

Nominal GDP=C+I+G+(X−M)
where:C=Consumer spendingI=Business investmentG=Government spendingX
−M=Total net exportsNominal GDP=C+I+G+(X−M)
where:C=Consumer spendingI=Business investmentG=Government spendingX
−M=Total net exports
 
Although U.S. real GDP increased by 2.6% in the third quarter of 2022 on an annualized basis,
nominal GDP, which is called current-dollar GDP by the BEA, increased by 6.6%.3

Real GDP vs. Nominal GDP

Because GDP is one of the most important metrics for evaluating the economic activity, stability,
and growth of goods and services in an economy, it is usually reviewed from two angles: real
and nominal. The table below highlights some of the main differences between the two types of
GDP used by economists, businesses, investors, and government leaders.

Differences Between Real GDP and Nominal GDP

Real GDP  Nominal GDP 

Based on Base year market prices Current market prices

Adjusted for Yes No
Inflation
Value (During Lower Higher
Inflation)
How Accurate More accurate  May overstate growth during times of
inflation
Other Names Constant dollar or inflation- Current dollar GDP
adjusted GDP
Economists use the BEA’s real GDP headline data for macroeconomic analysis and central
bank planning. As the table above indicates, the main difference between nominal GDP and real
GDP is the taking of inflation into account. Since nominal GDP is calculated using current
prices, it does not require any adjustments for inflation. This makes comparisons from quarter to
quarter and year to year much simpler to calculate and analyze. Keep in mind, though, that any
comparisons are less relevant.

As such, real GDP provides a better basis for judging long-term national economic performance
than nominal GDP. Using a GDP price deflator, real GDP reflects GDP on a per-quantity basis.
Without real GDP, it would be difficult to identify just from examining nominal GDP whether
production is actually expanding—or it's just a factor of rising per-unit prices in the economy.

A positive difference in nominal minus real GDP signifies inflation and a negative difference
signifies deflation. In other words, inflation occurs when nominal GDP is higher than real GDP.
Deflation happens when real GDP is higher than nominal GDP.

The GDP price deflator is considered to be a more appropriate inflation measure for measuring
economic growth than the consumer price index (CPI) because it isn't based on a fixed basket of
goods.
Example of Real GDP vs. Nominal GDP
Real GDP will be lower than nominal GDP during inflationary periods and is higher when the
economy experiences deflation. Let's demonstrate this using the example of a hypothetical
country. Suppose it had a nominal GDP of $100 billion in 2000, which grew by 50% to $150
billion by 2020. Over the same period of time, inflation reduced the relative purchasing power of
the dollar by 50%.

Looking at just the nominal GDP, the economy appears to be performing very well, whereas the
real GDP expressed in 2000 dollars would actually indicate a reading of $75 billion, revealing in
fact a net overall decline in economic growth had occurred. It is due to this greater accuracy that
real GDP is favored by economists as a method of measuring economic performance.

What Does 'Real' Mean in Real GDP?

Real GDP tracks the total value of goods and services calculating the quantities but using
constant prices that are adjusted for inflation. This is opposed to nominal GDP, which does not
account for inflation. Adjusting for constant prices makes it a measure of real economic output
for apples-to-apples comparison over time and between countries.

What Does Real GDP Measure?

Real GDP is an inflation-adjusted measurement of a country’s economic output over the course
of a year. The U.S. GDP is primarily measured based on the expenditure approach and calculated
using the following formula: GDP = C + G + I + NX (where C=consumption; G=government
spending; I=Investment; and NX=net exports). 

Why Is Real GDP More Accurate Than Nominal GDP?

Real GDP is considered to be more accurate than nominal GDP because it factors inflation (or
price changes) into its calculation. As such, it measures the total health of the economy. Nominal
GDP, on the other hand, doesn't necessarily provide an accurate picture of the economy or where
it's headed. That's because it factors current market prices into its calculation. This means that it
can only be used as a comparative metric to others that aren't adjusted for inflation.

Why Is Measuring Real GDP Important?

Countries with larger GDPs will have a greater amount of goods and services generated within
them, and will generally have a higher standard of living. For this reason, many citizens and
political leaders see GDP growth as an important measure of national success, often referring to
GDP growth and economic growth interchangeably. GDP enables policymakers and central
banks to judge whether the economy is contracting or expanding, whether it needs a boost or
restraint, and if a threat such as a recession or inflation looms on the horizon. By accounting for
inflation, real GDP is a better gauge of the change in production levels from one period to
another.

What Are Some Critiques of Using GDP?

Many economists have argued that GDP should not be used as a proxy for overall economic
success, as it does not account for the informal economy, does not count care work or domestic
labor in the home, ignores business-to-business activity, and counts costs and wastes as
economic activity, among other shortcomings.

The Bottom Line

Real GDP is an economic metric that is used to describe the economic output of a country within
a specific year. It reflects the value of all goods and services produced while factoring inflation
into its calculation. You may often hear it referred to by other names, such as constant-price
GDP or inflation-corrected GDP. This is in contrast to nominal GDP. This metric uses current
prices to measure the output for goods and services.

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ARTICLE SOURCES
Note: Calculation of overheads chargeable to Job No. 58 was made as follows:
Problem 2
The expenses shown below were incurred for a job during the year ended on 31 March 2019.

The total price for the above job was $180,000.

Required:

 You are required to prepare a statement showing the profit earned from the job
during the year ended 31 March 2019, as well as an estimated price of a job which
is to be executed in the year 2019-20.

 You should charge the same percentage of profit on sales as was the case for the
the year 2019-20. Materials, wages, and chargeable expenses will be required at
$50,000, $70,000, and $20,000, respectively, for the job.

The various overheads should be recovered on the following basis while calculating the

estimated price:
  Factory overheads  as a percentage of direct wages

 Administrative and selling and distribution overheads as a percentage of factory

cost

Solution

Note: Calculation of overheads rates and percentage of profit on sales took place as follows:
Problem 3
M/s. Perfect Printers Ltd. operates a printing press. During November 2019, the plant was
operating at full capacity. The material and labor costs of Job No. 101 and all other jobs worked
on in November are shown below.

In addition to these costs, factory overheads incurred in November amounted to $44,000.

Overhead is allocated to production based on direct labor costs.

Required:

 Show the factory's profit or loss on Job No. 101 using two different methods
of accounting for overtime premium. Assume that the contract price for the job is
$40,000.

 Indicate under what circumstances each method should be used.

 State whether the profit or loss of the company during November would be
affected by the choice of one method or another.

Solution
Factory Overhead Recovery Rate = (Factory Overhead / Direct Labor Cost) x 100
= (44,000 / 44,000) x 100 = 100%
Task 1A

If the overtime premium is fully charged to Job No. 101, the job cost sheet would be prepared as
shown below.

Task 1B

If the overtime premium is charged pro-rata to all jobs, the job cost sheet would be prepared as
follows:

Task 2

The overtime premium should be charged fully to Job No. 101 if it was a rush job and it was
done at the request of the customer.
However, if the overtime work was due to limited production capacity and it was accidental that
Job No. 101 was undertaken during the overtime, then the overtime premium should be charged
pro-rata to all jobs.

Task 3

The company's profit and loss during November will be affected by the choice of any method if
all the jobs performed during the month are not completed by the end of the month.

If the overtime premium is fully charged to Job No. 101 but is not completed by 30 November
2019, then the loss on the job will not be included in the account for November 2019.

Similarly, if the overtime premium is charged pro-rata to all the jobs, the profit or loss on any job
that remains incomplete will be carried over to the next month.

Problem 4
The job details shown below were taken from the costing books of a contractor for the month of
December 2019.

The respective job accounts showed the following balances in the contract ledger on 30
November 2019.

 Job No. 201 = $321,580

 Job No. 202 = $141,865

A certificate of completion was obtained for Job No. 201. Of the balance of this account standing
on 30 November 2019, $61,500 was in respect of plant and machinery. The remainder consisted
of wages and materials.

A machine costing $5,500, specially brought for this contract, was also sold for $2,000 in
December 2019.

For the remainder of the balance on plant and machinery, $40,000 was used on the job for 8
months and the rest for 6 months.

Of the former, 50% was transferred to Job No. 202 and the whole of the remaining plant was
returned to stores. The contract price for Job No. 201 was fixed at $375,000.

Required:

 Prepare contract accounts for Job Nos. 1 and 2 and state the profit made on jobs
certified as completed.

 Allow depreciation on machinery at 15% per annum. Assume 10% for

establishment charges on the cost of wages and materials consumed.

Solution

Working
1. Establishment charges in respect of Job No. 201 A/c were calculated as follows:
2. Depreciation on plant and value of plant returned to stores were calculated as follows:

3. A plant costing $40,000 was used for 8 months and a plant costing $16,000 was used for 6
months:

4. Half of the plant, with a total depreciated value of $36,000, was transferred to Job No. 202:

Job Costing Examples, Practical Problems and Solution

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In this article we will discuss about top five problems on job costing with their relevant solutions.

Contents:

Job Costing Problem 1 with Solutions

Job Costing Problem 2 with Solutions
Job Costing Problem 3 with Solutions
Job Costing Problem 4 with Solutions
Job Costing Problem 5 with Solutions

ADVERTISEMENTS:

Job Costing Problem 1:

(a) Show the works cost and total cost, the percentages that the works overhead cost bears to the
Manual and Machine Labour Wages and the percentage that the Establishment and General Expenses
bear to the works cost.
(b) What price should the Company quote to manufacture a machine which, it is estimated, will require
an expenditure of Rs.8,000 in material and Rs.6,000 in wages, so that it will yield a profit of 25% on the
total cost or 20% on the selling price.

Job Costing Problem 2:

The following direct costs were incurred on Job. No. 415 of Standard Radio Company:

Job Costing Problem 3:

By February, 1992 100 units of product X were produced on a Job Order No. 009 which commenced on
26 February, 1992:

The following are the particulars of expenses from which you are to prepare a Job Cost Sheet for the Job
Order No. 009:

ADVERTISEMENTS:
Job Costing Problem 4:

ADVERTISEMENTS:

Budgeted figures:

Prepare a comparative statement of cost showing the result of application of each of the above rates to
Job No. 200 from the data given below:

Job Costing Problem 5:

The following is the budget of Joy Engineering works for the year 1993:

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Top 5 Job Costing Problems with Solutions | Cost Accounting

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In this article we will discuss about top five problems on job costing with their relevant solutions.
Contents:
1. Job Costing Problem 1 with Solutions
2. Job Costing Problem 2 with Solutions
3. Job Costing Problem 3 with Solutions
4. Job Costing Problem 4 with Solutions
5. Job Costing Problem 5 with Solutions

ADVERTISEMENTS:
Job Costing Problem 1:

(a) Show the works cost and total cost, the percentages that the works overhead cost bears to the
Manual and Machine Labour Wages and the percentage that the Establishment and General Expenses
bear to the works cost.
(b) What price should the Company quote to manufacture a machine which, it is estimated, will require
an expenditure of Rs.8,000 in material and Rs.6,000 in wages, so that it will yield a profit of 25% on the
total cost or 20% on the selling price.
Job Costing Problem 2:
The following direct costs were incurred on Job. No. 415 of Standard Radio Company:
Job Costing Problem 3:
By February, 1992 100 units of product X were produced on a Job Order No. 009 which commenced on
26 February, 1992:
The following are the particulars of expenses from which you are to prepare a Job Cost Sheet for the
Job Order No. 009:
ADVERTISEMENTS:

Job Costing Problem 4:
ADVERTISEMENTS:
Budgeted figures:
Prepare a comparative statement of cost showing the result of application of each of the above rates
to Job No. 200 from the data given below:

Job Costing Problem 5:
The following is the budget of Joy Engineering works for the year 1993:
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