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Mathematical Equivalence of Nominal and Real GDP Ratios
The mathematical identity between GDP ratios calculated using nominal versus real values can be shown with the following formula, which expresses the share of consumption in GDP:
The left side of the equation represents the ratio in nominal terms: nominal consumption () divided by nominal GDP (), where is the price level and is real GDP. The equivalence is demonstrated by dividing both the numerator () and the denominator () by the price level (). This algebraic manipulation transforms the expression into the ratio of real consumption () to real GDP (), as seen on the right side. This confirms that the share is identical whether calculated with nominal or real values.
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Mathematical Equivalence of Nominal and Real GDP Ratios
Use of Nominal GDP for Budget Deficit and Debt Ratios
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An economist observes that in a single year, an economy experiences significant inflation, causing the general price level to double. If real consumption and real GDP remain unchanged during this period, the calculated share of nominal consumption in nominal GDP will also double.
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