GDP and Inflation - what's that....

I kind of wonder what's the formula for GDP calculation and the inflation rate,so i managed to get the simple formula using an understandable example shown below;

GDP and CPI Calculations

Key Concept:
If you want to measure the change in quantity over the span of a year you have to hold the prices fixed. If you want to measure the change in prices over a year you have to hold the quantity fixed.

Good/Year Quantity of Beef Price of Beef Quantity of Corn Price of Corn Quantity of Computers Price of Computers
2000 100 $2 300 $1 50 $5
2001 150 $2 400 $1.5 60 $7
2002 150 $3 500 $2 70 $8

Calculating Nominal GDP
Nominal GDP measures both the change in prices and the change in quantity. To calculate the change in nominal GDP from year to year we must calculate the cost of all goods produced in any one given year using the prices of that year and measure the percent change from year to year.

2000: 100*$2 + 300*$1 + 50*$5 = $750
2001: 150*$2 + 400*$1.5 + 60*$7 = $1320
2002: 150*$3 + 500*$2 + 70*$8 = $2010

The numbers in bold represent the cost of all goods produced in the indicated year. To measure percent change from one year to the next you use the following formula:
(Value in year 2 – Value in year 1)/Value in year 1 *100%
Therefore the calculation for the percent change in Nominal GDP from year 2000 to 2001 would be (1320-750)/750 * 100% = 76%
This means that nominal GDP grew at a rate of 76% from 2000 to 20001.
From 2001 to 2002 the calculation of Nominal GDP looks as follows:
(2010-1320)/1320 *100% = 52.27%
Remember when calculating Nominal GDP to allow both prices and quantity to vary.

Calculating Real GDP
Real GDP measures the change in quantity produced. In order to measure the change in quantity produced we fix the price of all goods being produced. We use the prices of the goods in whatever base year is decided. For our calculations we will use 2000 as a base year. This means that for all our calculations the price of beef will be $2, the price of corn $1 and the price of computers $5. In order to find the value of all goods produced in a given year we take the sum of the 2000 values of all goods produced in any given year.

2000: 100*$2 + 300*$1 + 50*$5 = $750
2001: 150*$2 + 400*$1 + 60*$5 = $1000
2002: 150*$2 + 500*$1 + 70*$5 = $1150

To calculate the percent change we use the same formula that we used before.
Percent change from 2000 to 2001 would be:
(1000-750)/750 * 100% = 33.3%
Percent change from 2001 to 2002 would be:
(1150-1000)/1000 * 100% = 15%

This means the economy grew at a rate of 33.3% in 2000 and a rate at 15% in 2001.
Remember that when you want to measure the change in quantity produced, you must keep the prices fixed.

Calculating the GDP Deflator:
To calculate the GDP deflator you simply take the Nominal GDP and divide it by the Real GDP and multiply by 100. This will measure the growth of prices in the economy.

GDP Deflator for
2000: (750/750) *100 = 100
2001: (1320/1000) * 100 = 132
2002: (2010/1150) * 100 = 175

Note that your base year GDP Deflator should have a measurement of 100 since the prices used in the Nominal GDP calculation and the Real GDP calculation were the same. If you don’t have a GDP Deflator of 100 for your base year, try your calculations again.

Next to calculate the inflation rate one can calculate the percent change from year to year using the above mentioned formula.
Percent change from 2000 to 2001:
(132-100)/100 * 100% = 32%
Percent Change from 2001 to 2002:
(175-132)/132 * 100% = 32.6%

Note that this is only one measurement of inflation. Later we will go on to discuss another measurement, CPI. The main difference is that the GDP Deflator measures the change in prices of all goods while the CPI measures the change in prices of a specific basket of goods which consumers are likely to purchase.