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In 2015, nominal GDP = 120 x $50 + 100 x $65 = $6,000 + $6,500 = $12,500

In 2016, nominal GDP = 130 x $55 + 110 x $70 = $7,150 + $7,700 = $14,850

Nominal GDP has increased significantly, but what how much has real GDP changed between these years? To calculate RGDP, we first need to decide which one will be the base year. Use 2015 as the base year. Then, real GDP in 2015 equals nominal GDP in 2015 (always the case for the base year) = $12,500.

To calculate real GDP in 2016, we need to use the 2016 quantities and the 2015 prices, since 2015 is the base year.

RGDP in 2016 = 130 x $50 + 110 x $65 = $6,500 + $7,150 = $13,650.

Notice that RGDP has increased less than NGDP from 2015 to 2016. This will always be the case if both prices and quantities increase from year to year. (1)

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