Formula to Calculate Nominal GDP
The Nominal GDP can be termed as the total of all the services, finished products, goods that are produced in a given single year and which shall be stated at the current market prices. The formula to calculate nominal GDP is
- C is the Private consumption
- I is the Gross Investment
- G is the Government Investment
- E is Exports
- M is Imports
Calculation of Nominal GDP
The calculation of nominal GDP can be done using three methods which are the expenditure method, income method, and production approach.
- The one that is discussed above is the expenditure method where all the expenses that are spent on the domestic purchase of services and goods in a given year.
- In this method, we subtract import and add up export as the goods that have been exported have been producing in the nation whereas the goods that are imported produce elsewhere and not in the concerned nation.
- The Nominal growth domestic product takes into account the current prices along with growth when compared to the previous year’s GDP.
KPL is a developing country, the statistic department provides you with the below information, you are required to compute the nominal GDP of the country.
Below is given data for the calculation of nominal GDP.
Therefore, the calculation of nominal growth domestic product can be done as follows,
= 50,00,000 + 62,50,000 + 59,37,500 + (48,40,000 – 44,00,000)
Nominal growth domestic product will be –
Nominal growth domestic product = 17627500
Hence, the Nominal growth domestic product of the country is 1,76,27,500
The government of St. Marteen has self-declared itself as a different country and has separated itself with the conglomerate. New Ministers were appointed including the Prime Minister of the country. It has been two years since this government has been formed. The Prime Minister wants to gauge his performance as how the nation has been doing economically and in an overall growth perspective. He asks his finance minister to make a presentation in 2 weeks on the country’s GDP.
The Finance Minister visits the statistician department and first of all asked them to conduct a survey and other research in other to compute the country’s GDP. After thorough research, the department gathers below information:
Based on the above information, you are required to calculate the Nominal GDP of the country.
Here, this a newly formed country and wants to know its growth that can be the judge when one compares the nominal growth domestic product with a similar country.
We first need to gross investment which can be calculated as 10,000,000 / (0.9 * 0.9) = 1,23,45,679.01 as it has been amortize for 2 years at rate of 10%.
Gross Investment in Year 1 will be –
Gross Investment in Year 1 will be = 11111111.11
Gross Investment in Year 2 will be –
Gross Investment in Year 2 will be – 12345679.01
Therefore, the calculation of nominal GDP can be done as follows,
Nominal GDP will be –
Nominal growth domestic product = 14345679.01
Hence, the Nominal growth of domestic product is 1,43,45,679.01
Country SMS is trying to review its two years of performance by comparing what growth they had compared to the previous year’s GDP. The statistics department provides you with the below details for the two years. You are required to compute the GDP for both the years and calculate the growth in GDP in percentage compare to the previous year.
We are given all the variants that are required for calculation and hence we can use the below formula to calculate the nominal GDP.
Use the above information to calculate nominal GDP
Therefore, the calculation of nominal GDP for the previous year can be done as follows,
Nominal growth domestic product for the previous year will be –
Nominal growth domestic product = 8100000000
Therefore, the calculation of nominal GDP for the current year can be done as follows,
Nominal growth domestic product for the current year will be –
Nominal growth domestic product = 8527500000
Now to calculate the growth rate, we need to divide the difference of current year GDP and previous year GDP (which shall give us the increase in the value of GDP) and divide the result by previous year GDP.
Growth Rate in GDP will be –
= 852,75,00,000.00/8,10,00,00,000.00 – 1
Growth Rate in GDP = 5.28%
Hence, the growth rate compares to the base year is 5.28% growth.
Relevance and Uses
The Nominal growth domestic product is used to know at a glance how the nation has been comparing whether the country’s GDP is increasing or decreasing. Hence, the concept is relatively easy to understand. Nominal GDP is more of an absolute term that cannot be the judge on a standalone basis. Further, Nominal GDP also encompasses inflation in it. Hence, when one compares a year nominal GDP with the previous year nominal GDP, the growth figure could be misleading as it also includes inflation along with growth rate and hence one should use Real GDP while making a comparison.
This has been a guide to the Nominal GDP Formula. Here we discuss the calculation of nominal GDP along with practical examples and downloadable excel templates. You may learn more about macroeconomics from the following articles –