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ADJUSTMENT, LONG-RUN AGGREGATE MARKET: Disequilibrium in the long-run aggregate market induces changes in the price level that restore equilibrium. If the price level is above the long-run equilibrium price level, economy-wide product market surpluses cause the price level to fall. If the price level is below the long-run equilibrium price level, economy-wide product market shortages cause the price level to rise. In both cases long-run equilibrium is restored. Price level changes induce changes in aggregate expenditures but NOT changes in real production. The reason is that long-run aggregate supply is full-employment real production, which is unaffected by the price level.

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NOMINAL GROSS DOMESTIC PRODUCT:

The total market value, measured in current prices, of all goods and services produced within the political boundaries of an economy during a given period of time, usually one year. The key is that nominal gross domestic product is measured in current, or actual prices, the prices that buyers actually pay for goods and services purchased. Nominal gross domestic product is also termed current gross domestic product. A contrasting measure is real gross domestic product, which adjusts for inflation by measuring production at constant prices.
Nominal gross domestic product is actually nothing more than gross domestic product. A comparison between the definitions of gross domestic product and nominal gross domestic product indicates that both are virtually identical, with one minor difference. Nominal gross domestic product includes the phrase "measured in current prices."

This additional phrase only serves to emphasize that (nominal) gross domestic product is the total market value of all goods and services IN CURRENT PRICES. Nominal gross domestic product is actually just an extended, and somewhat more precise, name for gross domestic product. Whenever the term gross domestic product is used, without a qualifier or adjective, such as "real" or "constant," then it is nominal gross domestic product, it is CURRENT production at CURRENT prices.

So why the difference? Why the extra phrase? Why not just leave it at "gross" domestic product, with no "nominal" added? The extra phrase is included for contrast with real gross domestic product, an extremely important related measure of economic activity. Real gross domestic product adjusts nominal gross domestic product for inflation, or for changes in the average price level. Nominal gross domestic product is thus the current value of gross domestic product without adjusting for inflation.

While nominal gross domestic product is THE measure of current production at current prices, it is NOT the best indicator of economic progress. Because any change in nominal gross domestic product could result from changes in physical production, the prices of this production, or both, it is impossible to know how much progress the economy is making JUST by looking at changes in nominal gross domestic product.

For example, a 5 percent increase in nominal gross domestic product could be the result of:

  • A 5 percent increase in physical production, but no change in prices. Here there is a lot of progress, with no inflation.

  • A 5 percent increase in prices, but no change in physical production. Here there is a lot of inflation, but no progress.

  • A 4 percent increase in physical production and a 1 percent increase in prices, 1 percent increase in physical production and a 4 percent increase in prices, or any other combination of production and price changes that add up to 5 percent.

  • A 2 percent decrease in physical production and a 7 percent increase in prices, a 7 percent increase in physical production and a 2 percent decrease in prices, or any other combination of production and price changes that add up to 5 percent.

In fact, a relatively robust increase in nominal gross domestic product could result during a business-cycle recession, if inflation is high. Using only nominal gross domestic product is likely to disguise changes in real production.

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NOMINAL GROSS DOMESTIC PRODUCT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: September 23, 2018].


Check Out These Related Terms...

     | real gross domestic product | net domestic product | national income | personal income | disposable income | gross national product |


Or For A Little Background...

     | gross domestic product | business cycles | current production |


And For Further Study...

     | gross domestic product, ins and outs | gross domestic product, welfare | gross domestic product, expenditures | gross domestic product, income | National Income and Product Accounts | Bureau of Economic Analysis | National Bureau of Economic Research | business cycle indicators | circular flow | stabilization policies | potential real gross domestic product | unemployment | inflation |


Related Websites (Will Open in New Window)...

     | Bureau of Economic Analysis | Bureau of Labor Statistics |


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