Afghanistan Economy

Lecturer: Tasal Noorzai

 Real GDP
• Real Gross Domestic Product (real GDP) is a macroeconomic measure of the
value of economic output adjusted for price changes (i.e., inflation or
deflation).
• This adjustment transforms the money-value measure, nominal GDP, into
an index for quantity of total output.
• Although GDP is total output, it is primarily useful because it closely
approximates the total spending:
• The sum of consumer spending, investment made by industry, excess of
exports over imports, and government spending. Due to inflation, GDP
increases and does not actually reflect the true growth in an economy. That
is why the GDP must be divided by the inflation rate (raised to the power of
units of time in which the rate is measured) to get the growth of the real
GDP
 Example:

 Suppose we wish to calculate the real GDP for the year 2001 in terms of
1996 dollars.
 The value for (note that these values are for illustration purposes only) 1996
price deflator is 100 and the 2001 price deflator is 115.
 The 2001 GDP in nominal terms is $10 trillion dollars.
Then: Real GDP year 2001 in 1996 dollars =$10 trillion × (100 / 115) = $8.6 trillion
 Nominal GDP

• Nominal GDP is gross domestic product (GDP) evaluated at current market

prices, GDP being the monetary value of all the finished goods and services
produced within a country’s borders in a specific time period.
• Nominal differs from real GDP in that it includes changes in prices due to
inflation or a rise in the overall price level.
 The GDP Deflator
• The GDP deflator is an economic metric that converts output measured at
current prices into constant-dollar GDP.
• This includes prices for business and government goods and services, as well
as those purchased by consumers.
• This calculation shows how much a change in the base year's GDP relies
upon changes in the price level.
• If we wish to analyze the impact of price changes throughout an economy,
then the GDP deflator is the preferred price index. This is because it does
not focus on a fixed basket of goods and services and automatically reflects
changes in consumption patterns and/or the introduction of new goods and
services.
• Real GDP for a given year, in relation to a "base" year, is computed by
multiplying the nominal GDP for a given year by the ratio of the GDP price
deflator in the base year to the GDP price deflator for the given year.
 Difference between Nominal GDP and Real GDP
Basis for Comparison Nominal GDP Real GDP

The aggregate market value of the economic output Real GDP refers to the value of economic output
Meaning produced in a year within the boundaries of the produced in a given period, adjusted according to
country is known as Nominal GDP. the changes in the general price level.

What is it? GDP without the effect of inflation. Inflation adjusted GDP

Expressed in Current year prices Base year prices or constant prices.

Value Higher Generally, lower.

Comparison of various quarters of the given year can Comparison of two or more financial year can be
Uses
be made. done easily.

Economic Growth Cannot be analyzed easily. Good indicator of economic growth.