Nominal GNP vs Real GNP: What's the difference?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:41

The main macroeconomic indicators include GDP and GNP (nominal and real), net national income, national we alth, personal disposable income. All of them show the level of economic condition of the country, society, citizens.

How is the ratio "nominal GNP - real GNP" measured and what is this concept? What is a deflator? This will be discussed in more detail later.

Concept

Before we talk about nominal, real GDP indicators, let's move on to the question of the very concept of gross national product. This is one of the main macroeconomic indicators. It is calculated as the sum of the final market value of all goods and services produced by citizens both inside and outside the country.

For example, a certain Russian confectionery company has production facilities both in Russia and abroad. The sum of the final market value from the sale of products produced by all enterprises of this firm will be included in the total GNP. And goods produced at a factory inside Russia will only be included in GDP (grossdomestic product).

Thus, the gross national product is equal to: GDP plus the totality of goods produced by citizens outside the country. The concepts of "nominal GNP", "real GNP" will be analyzed a little lower. Now let's explain what the final cost of the goods is.

The concept of the final cost of goods

Each part, car spare part, glass, etc., can be sold on the market both in finished form and as part of a more complex product, such as a car.

To make macroeconomic indicators as objective as possible, only the sum of the final cost of goods is taken into account. One of the methods for determining it in the domestic market is value added tax.

Example

For example, a tractor factory buys engines from another company. In this case, these products will not be taken into account in the volume of macroeconomic indicators. They will include only the amount from the sale of the tractor. But if a certain engine factory sells the unit to the secondary market through an agricultural parts store, then its price will enter both GDP and GNP.

Nominal and real GNP rates

Sometimes in the economy of a state there are such processes as increased inflation, devaluation, denomination, etc. As a rule, macroeconomic indicators are calculated in national currencies, although the gross national product, of course, can be measured in conventional units. As inflation rises, money depreciates, which means thatmacroeconomic indicators, which should show the real state of affairs, need to be adjusted accordingly.

Let's give an example on wages about what nominal and real indicators are. Let's say that three years ago a certain citizen received a salary of 30 thousand rubles at the rate of 30 rubles for one dollar. That is, in fact, his salary is 1 thousand dollars. Today, his salary is also 30 thousand rubles. That is, this citizen nominally receives the same amount as before. However, today they can be purchased for less than $ 500. Considering that a huge number of goods in our country are from abroad, prices in stores have inevitably increased almost twice. Consequently, the citizen's real salary has become less than three years ago, despite the fact that the numbers (denomination) on the banknotes have not changed.

The link between nominal GNP and real GNP has the same meaning. It doesn't matter what the macroeconomic figures are today, what matters is whether the situation in the economy has changed for the better.

Nominal and real GNP: GNP deflator

The deflator calculates the growth or decline of the economy by measuring macroeconomic indicators over a certain period of time. It is calculated according to the formula: the sum of the value of market prices for goods and services for the current year, divided by the sum of the value of market prices for the reporting year. The result obtained must be multiplied by one hundred percent.

All scores below 100 will meanfalling GNP, above 100 - growth.

Those who have studied history know that the communists, having come to power in 1917, compared all indicators of their development with the "blessed" 1913. This year, indeed, the Russian Empire has become a world leader in all economic indicators. But only real indicators were compared: how much was collected, threshed, cast, etc. Then capitalism was rejected, and it was impossible to find out the monetary expression of macroeconomic indicators.

Today everything has changed. In the world of capitalism, indicators are compared in terms of its value. It doesn't matter how much grain was threshed last year, what matters is how much it was sold for.

When evaluating macroeconomic indicators, a certain year is taken as a basis. Typically one of the most economically successful.

The year 2007 is often taken as the basis. To calculate the rise or fall in the gross national product, we need to sum up the value of goods and services for 2007 and divide it by the figures for 2008 (or whatever we want the result for). We multiply the amount received by one hundred percent.

An example of calculating the GNP deflator

For example, the sum of all goods and services sold was 1 trillion. rubles for 2007 (conditional figures). In 2008, due to the crisis, it began to be 0.8. Thus, the GNP deflator will be calculated by the formula: (0.8/1) x 100=80.

That is, the GNP in 2008 was 80% of the pre-crisis 2007.

But we will only get nominalvolume.

In order to get real figures, it is necessary to take into account inflation indicators and the exchange rate of official currencies (if macroeconomic indicators were taken into account in the national currency).

For example, in 2014, the dollar was given about 35 rubles, in 2016 it was already about 62 (we won’t take into account the exact exchange rate, we only care about the essence). The main macroeconomic indicators are calculated in rubles (at least, we are informed about this in the news feeds). GNP figures for 2014 are about the same as in 2015 (if they grew, then not by much).

Let's conditionally assume that both in 2014 and 2015 the volume of GNP was in the amount of 1 trillion. rubles, but with a significant devaluation and growth of the currency by 1 trillion. rubles, we will buy dollars at the rate of 62 rubles per c.u. less by about 45% than at the rate of 35 rubles. for c.u.

Thus, the nominal figure remained at the same level - 1 billion rubles, while the real figures fell by almost 45%.

Of course, all leading economists and politicians calculate the gross national product, as a rule, in dollars. In this case, the devaluation of the national currency will not play a special role in determining the real and nominal volume, only inflation, which is observed in the dollar, according to the most rough estimates, is up to 1%.

Thus, after all the necessary calculations, we can compare the nominal/real GNP and determine the true state of affairs in the economy.

Inflation will always happen?

But when is real GNP equal to nominal GNP? This will happen with two indicators equal to zero:

• Inflation rate.
• The level of devaluation of the national currency against the world. That is, this event seems impossible. Never, according to economists' forecasts, will nominal and real GNP be equal in the modern capitalist world. Unless, of course, we take nominal figures for the year that was officially taken as the base year. For example, if the year 2007 is taken as the basis, then the real and nominal indicators in it will be equal. But then we will not be able to understand the dynamics of the economy.

Conclusion

So, we have analyzed such concepts as nominal GNP, real GNP, and also determined the deflator formula, which allows us to determine the development of the country.

We hope that we have revealed these concepts as accessible as possible. Indeed, in the world of economic crises, it is necessary to navigate in basic economic concepts.