Nominal GDP: Definition & Formula

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  • 0:00 Definition of Nominal GDP
  • 1:10 Expenditure Approach
  • 3:00 Income Approach
  • 5:23 Product Approach
  • 6:33 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

A country's GDP is one of the most important indicators of its economic strength. In this lesson, you'll learn about nominal GDP and how to calculate it. You'll also have a chance to reinforce your knowledge with a short quiz.

Definition of Nominal GDP

Elton is the finance minister of a small country. Part of his job is to monitor his country's economy to make sure it is healthy. One way he does this is by examining the country's gross domestic product. The gross domestic product (GDP) is the aggregate of all value of all the goods and services produced within a country during a specific period of time. The GDP tells Elton how well the economy is performing because he can compare it against historical numbers as well as against the GDP of other countries. The nominal GDP is the value of a country's GDP that is calculated at the current price level, which means it's not adjusted for inflation.

Since the nominal GDP isn't adjusted for inflation, it doesn't necessarily accurately reflect the economic strength of an economy over time, because the increase may be due to inflated prices rather than increased output. In order to get a better picture, Elton can calculate the real GDP, which uses base prices from a base year, rather than current prices, to get a better picture of growth.

Expenditure Approach

There are three different methods that Elton can use to calculate nominal GDP. Let's look at each one of them.

The first method is the expenditure approach. Elton can calculate nominal GDP by adding up all the spending and investment undertaken by businesses, governments, and individuals in the economy. The formula can be expressed as follows:

GDP = C + I + G + (X - M)


C = Consumption (This is the private consumption of goods and services in the economy.)

I = Private Investment (Keep in mind that investment is the acquisition of assets for the purpose of generating income or realizing an appreciation in value. It includes business investments, such as a factory and inventories and individual investments, such as a house purchase.)

G = Government spending (This is the total of all government spending on finished goods and services and also includes government investments in such things as infrastructure.)

X = Gross exports

M = Gross imports

Let's see Elton apply the calculation. In 2011, Elton's country had total private consumption of $13,500,000,000; total private investment of $6,700,000,000; government spending of $20,000,000,000; gross exports of $12,000,000,000; and gross imports of $2,100,000,000. What's the nominal GDP for his country in 2011? Let's do the math.

GDP = C + I + G + (X - M)

GDP = $13,500,000,000 + $6,700,000,000 + $20,000,000,000 + ($12,000,000,000 - $2,100,000,000)

GDP = $50,100,000,000

Income Approach

Elton can also use the income approach to measure GDP. First, Elton will add up all the income generated by households and businesses, including employee compensation, rent, interest, proprietor income (i.e. self-employment income), and business profits, which gets Elton the national income of his country. However, he's not quite done.

Elton has to make some adjustments to the national income to get the gross domestic product. He needs to add in all indirect business taxes paid to the government. Elton also has to take into account the depreciation of fixed capital assets used in the economy. For example, a factory built this year will slowly depreciate, or become less valuable as it wears down and eventually becomes nonfunctional or too obsolete to use. Finally, Elton needs to include the net foreign income, which is calculated by subtracting the payments received from the foreign sector from the payments made to the foreign sector.

Having gathered all his data, Elton can apply the following formula to come up with GDP using the income approach:

GDP = Employee Compensation + Rent + Interest + Self-Employment Income + Business Profits + Indirect Business Taxes + Depreciation + Net Foreign Income

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