Calculation of change in a sale can be done as follows-. What is 115/100? I don't think it really matters here because the $ cancels out and so it is still without a unit. The calculation of nominal GDP can be done using three methods which are the expenditure method, income method, and production method. Direct link to McCarthy, Meghan's post Is the Real GDP of the ba. Then, after multiplying that by 100 to get a percentage, youre all set. However, there is a slight problem with the method above. As would be expected, positive values will indicate a percentage increase (e.g., a price raise), whereas negative values indicate a percentage decrease (e.g., a price cut). Economic growth rate typically refers to the increase in the inflation-adjusted market value of the goods and services produced by an economy over a specific period. How much did the average price of goods produced in Switzerland change between 2017 and 2018? GDP = C + I + G +NX Where, CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. No votes so far! Gross National Income (GNI) is calculated a country's GDP plus net income received from overseas sources. Direct link to Jackson Lautier's post According to the article,, Posted 6 years ago. Direct link to e.argirova24's post Suppose the amount of out, Posted 3 years ago. Suppose that in the year following the base year, the GDP deflator is equal to 110. The one discussed above is the expenditure method, where all the expenses are spent on the domestic purchase of services and goods in a given year. Direct link to SA's post In the self check questio, Posted 6 years ago. Copyright 2023 . As an example of a CPI index, assume for the sake of simplicity that the basket of goods consumed by a typical household consisted of just three goods: pizza, soda, and ice cream. In this case, were looking for the percentage increase. What is the difference between a series of economic data over time measured in nominal terms versus the same data series over time measured in real terms? The formula for the CPI is given as. The GDP deflator is a price index, which means it tracks the average prices of goods and services produced across all sectors of a nation's economy over time. If an unwary analyst compared nominal GDP in 1960 to nominal GDP in 2010, it might appear that national output had risen by a factor of 27 over this timeGDP of, The graph shows that nominal GDP has risen substantially since 1960 to a high of, Remember, nominal GDP is defined as the quantity of every good or service produced multiplied by the price. So what if a House gains value? If there is 2.5% inflation, then price level of 2011 in comparison to the 2010 price is 2.5% more right? Then, compare the two rates over a period of years to assess how the growth rates stack up against each other. There are various ways to do so. Therefore, the calculation of nominal GDP for the previous year can be done as follows, =1000000000+350000000+5000000000+2500000000-750000000, Nominal growth domestic product for the previous year will be , Nominal growth domestic product = 8100000000. The "GDP Deflator" however is simply the new, complete price of all final good and services (whether it is inflated or deflated, or the same) compared to the base year. So that's where the 102.5 price level comes from. The real GDP of any year is found by using the prices of goods and services in the base year. An increase in GDP does not necessarily mean a nation has produced more output; it must be specified whether the GDP in question is nominal or real. 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. How much is he going to increase the price? The old product took 5 hours to make, whereas the new product takes 7 hours to make. a) Given the base year of 2011, calculate nominal GDP, real GDP, and GDP deflator for each year. url="https://www.wallstreetmojo.com/nominal-gdp-vs-real-gdp/"]Nominal GDP vs Real GDP. Are you sure you want to remove #bookConfirmation# But, first, you must compute the GDP for both the years and calculate the growth in GDP in percentage compared to the previous year. Jack received his BS from Hampshire College. If inflation increases, will real gdp decrease? The graph shows the relationship between real GDP and nominal GDP. Hope this helps. The one discussed above is the expenditure method, where all the expenses are spent on the domestic purchase of services and goods in a given year. Unemployment Rate. The consumer price index (CPI) is the most commonly used price index, which you'll learn more about later in this course. Calculate the GDP deflator for the economy. Knowing that, we can extract the increase in prices from nominal GDP in order to measure only changes in output. Multiply both sides by the real GDP, divide both sides by 1.025. Real GDP= Quantity A* BasePrice. I suppose GDP is usually expressed in US dollars to be able to do comparisons between countries. Here, this is a newly formed country and wants to know its growth so that one can judge when one compares the nominal growth domestic product with a similar nation. Direct link to wakoka2014's post i find this whole idea of, Posted 7 years ago. It measures the country's total income from domestic and foreign sources for a given year. We use cookies to make wikiHow great. Looking at economic statistics without considering inflation is like looking through a pair of binoculars and trying to guess how close something isunless you know how strong the lenses are, you cannot guess the distance very accurately. Our real GDP is what we want to figure out. Is the deflator the same as the inflation or is it more complicated than that? It is used for many purposes in finance, often to represent the price change of a security . Among the many other price indices, the consumer price index (CPI) is the most frequently cited. The table below shows the output and the prices of Switzerland in 2017 and in 2018. Expenditure Approach The expenditure approach is the most commonly used GDP formula, which is based on the money spent by various groups that participate in the economy. Hence, it measures the change in nominal GDP and real GDP during a particular year calculated by dividing the nominal GDP with the real GDP and multiplying the resultant with 100. Use it to try out great new products and services nationwide without paying full pricewine, food delivery, clothing and more. Jack Flynn is a writer for Zippia. However, if it grows at 2 percent per year, it will take only 35 years to reach the US level. Overall, its an incredibly useful concept for companies and individuals alike! Even GDP needs to keep it real. Therefore, this method overstates growth in real GDP because it makes it seem like goods make up a bigger share of spending than they really do. FV = final value. Applying the GDP growth rate formula, which is GDP growth = (GDP in current period - GDP in the previous period) / GDP in the previous period 100, the following calculation has to be made: GDP growth = (17,304,984 -16,920,328) / 16,920,328 100 = 2.27% The US economy experienced the fastest economic growth in the 19th century, on average by about 4.5% per year. The Prime Minister wants to gauge his performance as the nation has been doing economically and overall growth. Is the deflator 102.5 or 1.025? Direct link to Sher Jav's post This is driving me nuts! By signing up you are agreeing to receive emails according to our privacy policy. Some fees are rising, and others are falling. So the CPI basically measures the changes in the price level of goods/services. Is the deflator always in reference to 100? As you know, this is all in comparison to a specific base year (in this case 2010). How does this give us our inflation value? Expenditure Approach GDP = C + I + G + (X - I) Where: C = Consumer Spending: The total amount of spending that individuals spent on goods and services for personal use First, find the difference between the two values you want to compare. Further, nominal GDP also encompasses inflation. 100% (1 rating) Formula to calculate % change in nominal GDP nominal GDP of the current year - nominal GDP of previous year/ nominal GDP of previous year 100 Formula to calculate % change in real GDP Real GDP of the current year - real GDP of previous year/ real . Economic indicators and the business cycle, [Why does the table read "GDP deflator, 2005=100"? Real GDP is a variation of GDP adjusted for price changes such as inflation or deflation. The calculation of nominal GDP can be done using three methods which are the expenditure method, income method, and production method. To calculate real GDP, we must discount the nominal GDP by a GDP deflator. In this first example, consider the following: James wanted to buy a $22 bowl set but didnt have money at the time. Enjoy! And so you have this 15 trillions divided by 1.025 or you can divide both sides by 1.025 and multiply both sides by the real GDP. This will give you a decimal. Enter your own data to calculate nominal GDP growth. You can double check your answers by looking at the far-right column in the table below. To demonstrate this, it might be a good idea to check the rule of 72 and apply it to the puzzle of long-term economic growth. Direct link to Learner's post Nominal GDP in the base y, Posted 3 years ago. Now, in 2017, the same tablet, same brand, quantity, etc, costs you 1.50$. If you were to calculate the Deflator now (for verification) it's Nominal GDP/Real GDP - in this case you've got 138$/115$ = 1.2 (multiply it over 100) you get 120%. You can use the percentage change formula to track individual securities, the value of currencies, and more. I have a bad memory. Direct link to Enn's post The real GDP of any year , Posted 3 years ago. start text, C, A, N, space, end text, dollar sign, 1, comma, 994, point, 9, start text, space, b, i, l, l, i, o, n, end text, start text, C, A, N, space, end text, dollar sign, 1, comma, 857, start text, space, b, i, l, i, o, n, end text, dollar sign, 1, comma, 857, start text, space, b, i, l, l, i, o, n, end text, dollar sign, 1, comma, 995, start text, space, b, i, l, l, i, o, n, end text, start text, C, A, N, space, end text, dollar sign, 1, comma, 994, start text, space, b, i, l, l, i, o, n, end text. , Posted 5 years ago. To calculate the percentage change in each of these statistics from 2018 to 2019, we can use the following formula: Nominal GDP is a measure of how much is spent on output. Solution: GDP Deflator is calculated using the formula given below. We can calculate it through the formula: ( (Yt-Yt-1) / Yt-1) x100 =% Inflation and growth rate Inflation is an increase in the general level of prices over a period covering the whole economy. It's both of those, right? In the self-question resolution why the deflator is being measured in dollars? In order to calculate a CPI for this basket of three goods, one needs only the total base year and current year expenditures on all three goods. price index for GDP), answer the following questions: Instructions: For parts \( a, c, d \), and e, enter your responses as a percentage rounded to one decimal place. Source: www.bea.gov. (8x200=1600) replacing the 210 with 200 in the equation shows us that it was in fact 8 x 200. what will be France's per capita real GDP be in 2045, given GDP of $28900 in 2003 with growth of 1.9%. It has been two years since this government was formed. To log in and use all the features of Khan Academy, please enable JavaScript in your browser. Real GDP = nominal GDP / GDP Deflator (the price level of 2011) x (100). Paul is working on a new product for his small business and wants to understand better how he should price it. See our GDP per Capita calculator to learn more. Consumer price index. Annual inflation is usually a percentage of the overall increase in cost of living and overall increase in the CPI. implying that the GDP deflator index has increased 10%. Security represents any kind of tradable financial asset. Converting your answer from a decimal to a percentage is easyjust multiply the value by 100. Which means : - (Price in year A) * 120% = Prince in year B => 1$ *120% = Price in year B. Dynamic economic growth gains particular relevance in the long run. Its easy to calculate and can be useful for companies and individuals alike. This will give you a decimal. The formula to calculate nominal GDP is, You are free to use this image on your website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Nominal GDP Formula (wallstreetmojo.com). Canadas GDP deflator for its base year of 2010 was, By expressing 2015s output in 2015 prices, therefore, Canadas output would appear to have increased by. This can be anything from prices to time itself. And then we can just solve for the real GDP. A real interest rate is the percentage amount of money that is paid for a deposit. The statistics department provides you with the below details for the two years. Source: Bureau of Economic Analysis, www.bea.gov. Because of that, our measure of output might get distorted by something like inflation. To calculate the GDP deflator for each year, we divide the nominal GDP by the real GDP and multiply by 100: GDP deflator 2018 = ($200 / $200) x 100 = 100; GDP deflator 2019 = ($600 / $400) x 100 = 150 2. To log in and use all the features of Khan Academy, please enable JavaScript in your browser. So im just a tad confused here, the deflater is it always over 100 or how do you find the that denominator? Okay! If we take 2007 as the base year, we can measure real GDP in 2017 by valuing output quantities in 2017 using 2007 prices. Direct link to Zach Geske's post For the self test questio, Posted 6 years ago. Based on data from the table in the Try it on your own! Let's say the GDP deflator, relative to 2010, you always have to know what you're taking your deflator relative to, is a 102.5 and this is, once again, the 2011 GDP deflator. How to Calculate the Growth Rate of Nominal GDP, https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/economic-iondicators-and-the-business-cycle/real-vs-nominal-gdp/a/lesson-summary-real-vs-nominal-gdp, http://www.diffen.com/difference/Nominal_GDP_vs_Real_GDP, https://www.cbinsights.com/research-how-to-calculate-nominal-gdp, https://courses.lumenlearning.com/wm-macroeconomics/chapter/converting-real-gdp/, http://arnoldkling.com/econ/GMU/growthArith.htm, http://www.investopedia.com/terms/n/nominalgdp.asp, calcular la tasa de crecimiento del PIB nominal, , Calcular a Taxa de Crescimento do PIB Nominal. It is conventionally measured in percentage terms since it is the most supportive way to make a comparison over time and space. KPL is a developing country, and the statistics department provides you with the below information. The quantities consumed of each of these three goods in the base year are given in Table , along with the prices of these three goods in both the base year and the current year. 1. How much has the value of the dollar inflated in the past ten years? Nominal GDP is the GDP of the country measured at current market prices. Basically, there are a bunch of different ways that economists try to measure. The "compute the percentage change in nominal gdp, real gdp and the gdp deflator" is a question that asks how to calculate percentage changes in GDP. a) Calculate Switzerlands nominal GDP in (i) 2017 and (ii)2018. b) Calculate Switzerlands real GDP in 2018 using constant 2017 prices. The simplest way to calculate nominal GDP growth is by analyzing two consecutive periods. This calculation is meant to represent a percentage increase, but if the percentage you get is negative, that would mean that the percentage change is a decrease. Since an increase in GDP can only occur for two reasons, we can use the ratio 51/(51+39) to determine the percentage of the increase in GDP due to price increases (i.e., inflation). Stocks and bonds are not included here since they do not add to any actual output. This ration is the same no matter what number you pick in T1 ($100, $1, $1000 or whatever). This means that when we deflate nominal figures to get real figuresby dividing the nominal by the price indexwe also need to remember to divide the published price index by 100 to make the math work. 1.025 really is the GDP deflator divided by 100, the base price level. Direct link to Lauren Cosenza's post Is the deflator the same , Posted 10 years ago. In this case, Thus, the percentage change in the current year CPI from the base year CPI is, In other, words, the rate of inflation in the current year is 3.67%, Next I understand how we get the 51% and 39% numbers, but why do we divide 51% by (51+39)? wikiHow is where trusted research and expert knowledge come together. Transcribed image text: This has decreased its value. The formula, specific to calculating NGDP, can be expressed as, So, continuing with the cumulative growth example, we would have. c) Calculate the GDP deflator price index for 2018. They are the same thing. The GDP deflator measures the change in the annual domestic production due to changes in price rates in the economy. In the previous video, GDP Deflator is defined as Ratio of P2/P1. For example, in Canada during 2015, Real GDP is a measure of how much is actually produced. This calculator will be most commonly used when there is an "old" and . Direct link to Victor's post How would you find the re, Posted 3 years ago. Some of his most popular published works include his writing about economic terms and research into job classifications. B.Tech in financial mgt. The gross domestic product (GDP) has become the foremost measure of economic activity for most countries. This percentage change is found to be. He asks his finance minister to make a presentation in 2 weeks on the countrys GDP. a price index used to adjust nominal GDP to find real GDP; the GDP deflator measures the average prices of all finished goods and services produced within a nations borders over time. CFA And Chartered Financial Analyst Are Registered Trademarks Owned By CFA Institute. Nominal GDP is $1,000,000 and the GDP deflator is 125. Expert Answer. How much did the national output rise between 1960 and 2010? (decimal = decrease initial value). Direct link to Learner's post How to draw the Marginal , Posted 3 years ago. Never miss an opportunity thats right for you. Here are some of the most common and useful ways percentages are employed: And more! Of course, that understates the material improvement since it fails to capture improvements in the quality of products and the invention of new products. Topics include the distinction between real and nominal GDP and how to calculate and use the GDP deflator. This calculation is meant to represent a percentage decrease, but if the percentage you get is negative, that would mean that the percentage change is an increase. From 1800 to 2000, no other nation except Luxembourg managed to grow at a pace as high as the US, which is why by the year 2000, the US was the second wealthiest country in the world. We are given all the variants required for calculation, so we can use the formula below to calculate the nominal GDP. There are two primary methods or formulas by which GDP can be determined: 1. You may learn more about macroeconomics from the following articles . Calculating Nominal Gross Domestic Product There are a few ways to calculate the nominal Gross Domestic Product: 1. You are free to use this image on your website, templates, etc., Please provide us with an attribution link. You divide the real GDPs of both years and see in 39% increase in Real GDP. They took the fourth quarter number and they that analysed this to get to this 15 000 billion, which is esentially 15,294.3 trillion dollars of GDP. Note that in the base year, real GDP is by definition equal to nominal GDP so that the GDP deflator in the base year is always equal to 100. Therefore, the calculation of nominal GDP can be done as follows, =9000000+12345679.01+5000000+(3000000-15000000), Nominal growth domestic product = 14345679.01, Hence, the Nominal growth of domestic product is 1,43,45,679.01. It's not counted because it's just money changing hands. This article was co-authored by wikiHow Staff. The GDP deflator is not the only index measure of the price level. Direct link to misskoya14's post why is it important for i, Posted 5 years ago. Here's the formula for percentage increase: Percentage change = (FV IV) IV 100. The nominal growth domestic product is used to know how the nation has been and whether the countrys GDP is increasing or decreasing. If that's the case, Real GDP wouldn't be the same as Nominal GDP adjusted by US inflation for that period? In other words, what was the change in real GDP? (0.246 100 = 24.6%). There are several calculations that a country can make when trying to measure its economic progress. Direct link to angeljhart1997's post Step 2: Calculate real GD, Posted 6 years ago. You just say: Hey, let's take our current dollar GDP, divide it by the deflator, I guess you could say world - deflated, to get the real GDP. This percentage change is found to be Explain your answer. 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