What happens to the gross domestic product if the price of bread rises from $ 10 to $ 12? Suppose that the amount produced was constant, and that bread is the only product of the economy. The product uses nominal prices of each year, then reflect an increase in gross domestic product of 20%. But the amount of bread is the same! To solve this problem using the real gross domestic product. The real gross domestic product uses the
base year prices, for example, the first year. Then, in this case, the real gross domestic product was not affected. Or real gross domestic product is calculated by deflating nominal gross domestic product for inflation. In our case, the inflation rate is 20%, as real gross domestic product, calculated by the latter method is also kept constant. It goes without saying that these two methods yield the same results.
base year prices, for example, the first year. Then, in this case, the real gross domestic product was not affected. Or real gross domestic product is calculated by deflating nominal gross domestic product for inflation. In our case, the inflation rate is 20%, as real gross domestic product, calculated by the latter method is also kept constant. It goes without saying that these two methods yield the same results.
Economists generally use real gross domestic product, or an index of it, given that changes in gross domestic product due to changes in prices are not a reflection of changes in welfare of the population or the size of the economy .
PN = PI + national factor income made abroad - foreign factor income made locally.
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