Nominal GDP Formula

Nominal GDP Formula (Table of Contents)

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What is the Nominal GDP Formula?

The term “nominal GDP” or simply gross domestic product (GDP) refers to the total market value of all the goods and services produced domestically by a country in a calendar year, which is measured on the basis of current prices and current quantities. In other words, the nominal GDP helps in determining the economic output of a country during a calendar year. Since the nominal GDP is calculated using current market prices, it inherently includes the changes in the prices due to inflation or deflation over the period of time. The formula for nominal GDP can be derived by the addition of private consumption, gross investment, government investment, and exports minus imports. Mathematically, it is represented as,

where,

• C = Private Consumption
• I = Gross Investment
• G = Government Investment
• X = Exports
• M = Imports

Examples of Nominal GDP Formula (With Excel Template)

Let’s take an example to understand the calculation of Nominal GDP in a better manner.

Nominal GDP Formula – Example #1

Let us take the example of a country that reported private consumption of $7 trillion, gross investment of $11 trillion, government investment of $5 trillion, exports of $3 trillion in goods and services while the imports stood at $2 trillion during the year ended on December 31, 2018. Calculate the nominal GDP based on the given information.

Nominal GDP is calculated using the formula given below

Nominal GDP = C + I + G + (X – M)

• Nominal GDP = $7 + $11 + $5 + ($3 – $2)
• Nominal GDP = $24 trillion

Therefore, the country produced goods and services that worth nominal GDP of $24 trillion during the year.

Nominal GDP Formula – Example #2

Let us take the case of the US to illustrate the formula of the nominal GDP with a real-life example. As per the latest release by the US government on February 28, 2019, the following information is available pertaining to the initial GDP estimates for the year 2018.

Calculate the nominal GDP for the USA for the year 2018 based on the above table.

Solution:

Private Consumption is calculated using the formula given below

Private Consumption (C) = Private Consumption of Goods + Private Consumption of Services

• Private Consumption (C) = $4.34 + $9.61
• Private Consumption (C) = $13.95 trillion

Gross Investment is calculated using the formula given below

Gross Investment (I) = Gross Fixed Investment + Change in Private Inventories

• Gross Investment (I) = $3.60 + $0.06
• Gross Investment (I) = $3.66 trillion

Nominal GDP is calculated using the formula given below

Nominal GDP = C + I + G + (X – M)

• Nominal GDP= $13.95 + $3.66 + $3.52 + ($2.53 – $3.16)
• Nominal GDP= $20.50 trillion

Therefore, the nominal GDP for the US for the year 2018 stood at $20.50 trillion.

Explanation

The formula for nominal GDP can be derived by using the following steps:

Step 1: Firstly, determine the private consumption of the country which is the measure of consumer expenditure within the economy that may include the purchase of durable goods, nondurable goods, and services. It is denoted by (C).

Step 2: Next, determine the gross investment of the country which includes all the capital investment made within the economy. It is denoted by (I).

Step 3: Next, determine the government’s investment in the country’s infrastructure, government employee salary and many such capital investments made by the government. It is denoted by (G).

Step 4: Next, determine the country’s exports which is the value of the goods and services produced within the country and sold to other foreign nations. It is denoted by (X).

Step 5: Next, determine the country’s imports which is the value of the goods and services purchased from other foreign nations. It is denoted by (M).

Step 6: Finally, the formula for nominal GDP can be derived by adding of private consumption (step 1), gross investment (step 2), government investment (step 3) and exports (step 4) and then subtracting imports (step 5) from the result as shown below.

Nominal GDP = C + I + G + (X – M)

Relevance and Uses of Nominal GDP Formula

The concept of nominal GDP is an important one because economists predominantly use it to compare the outputs of different quarters of the same year. However, they avoid its use for comparison of figures as it can be misleading since it includes the effect price inflation or deflation. For instance, let us assume that the prices change from one period to the next while the output volume does not change, the nominal GDP would change despite the fact that the output has remained unchanged.

Nominal GDP Formula Calculator

You can use the following Nominal GDP Formula Calculator

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