Hi, very nice treatment of the topic! In the article (http://bnarchives.yorku.ca/598/
) I would change the numbers in the example section to make the point even more explicit. Here are my numbers:
In my economy there are eggs and apples. Nominal values
Year 1: 400 million (m) eggs sold at 0.1 $/egg = egg income $40m; 30,000 tonnes of apples at 2000 $/t = apple income $60m.
Total nominal egg-and-apple GDP = $40m + $60m = $100m.
Year 2: 250m eggs @ 0.2 $/egg = $50m; 50,000 t apples @ 1000 $/t = $50m.
Total nominal GDP = $50m + $50m = $100m.
So in nominal terms our economy is constant
.Real GDP based on year 1
By definition, real GDP of year 1 based on year 1 = nominal GDP of year 1 = $100m.
Real GDP of year 2 in prices of year 1: 250m eggs @ 0.1 $/egg = $25m; 50,000 t apples @ 2000 $/t = $100m.
Total real GDP year 2 = $25m + $100m = $125m.
So in "real terms" based on year 1 our economy has grown
by a whopping 25% instead of remaining constant.Real GDP based on year 2
Real GDP of year 1 in prices of year 2: 400m eggs @ 0.2 $/egg = $80m; apples 30,000 t @ 1000 $/t = $30m.
Total real GDP of year 1 in prices of year 2 = $80m + $30m = $110m.
By definition, real GDP of year 2 in prices of year 2 = nominal GDP of year 2 = $100m.
Thus our economy went down from $110m to $100m, or shrunk
by 9% (relative to year 1) if real GDP is based on year 2.Discussion
Rather than just showing how numbers differ, I think it is even more illustrative to show how the same set of numbers can indicate a constant, growing, or shrinking economy. Also using "100" makes percentages easier to see. I also think one should make it explicit that, by definition, "real" GDP equals nominal GDP for the base year.