Is the economy growing, or are prices rising?
Change prices, production and population. See nominal GDP, real GDP, the GDP deflator and real GDP per capita change together.
Fictional annual data in a two-good economy. Dollar amounts are illustrative. This fixed-base teaching model is simpler than official chained GDP methods.
Explore real data in the U.S. recession tracker →
1. Build your economy
All goods here are final goods produced and consumed domestically. Set prices or quantities to zero to explore limits; blank or negative inputs need correction.
| Input | Year 1 (base) | Year 2 | Year 3 |
|---|---|---|---|
| Meals: price ($) | |||
| Meals: quantity | |||
| Bicycles: price ($) | |||
| Bicycles: quantity | |||
| Population (people) |
2. Compare levels and growth rates
Growth (%) = (new value ÷ previous value − 1) × 100. These are annual changes, not annualized quarterly rates. Year 1 has no preceding observation.
| Measure | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Nominal GDP | 2,000Growth: — | 2,365Growth: 18.25% | 2,760Growth: 16.7% |
| Real GDP | 2,000Growth: — | 2,200Growth: 10% | 2,400Growth: 9.09% |
| GDP deflator | 100Growth: — | 107.5Growth: 7.5% | 115Growth: 6.98% |
| Real GDP per capita | 20Growth: — | 21.57Growth: 7.84% | 23.08Growth: 6.99% |
| Consumer basket price index | 100Growth: — | 107.5Growth: 7.5% | 115Growth: 6.98% |
GDP and per-person levels are dollars; price indexes use base year = 100. A zero denominator makes an index or growth rate undefined.
Year 3 explanation: Nominal output grew 16.7%; real output grew 9.09%; output per person grew 6.99%. Population growth can cause per-person growth to lag total output growth.
Nominal GDP: how it works
Σ(current price × current quantity)
Current-dollar production. Higher prices alone can raise it.
Real GDP: how it works
Σ(base-year price × current quantity)
Production valued at fixed prices. This separates quantity changes from price changes.
GDP deflator: how it works
(Nominal GDP ÷ real GDP) × 100
Domestic output price index. Its percentage change is GDP-deflator inflation.
Real GDP per capita: how it works
Real GDP ÷ population
Real output per person, not average pay or a measure of how income is distributed.
Consumer basket price index: how it works
(Current cost of base basket ÷ base cost) × 100
A simplified CPI-style index with base-year quantities held fixed. Its percentage change is basket inflation.
Exact relationship: 1 + nominal growth = (1 + real growth) × (1 + deflator inflation), with rates written as decimals. Subtracting inflation from nominal growth is only an approximation.
3. Inflation, deflation and disinflation
A price index moving from 100 to 110 means 10% inflation. Moving from 110 to 115.5 means 5% inflation: disinflation, because prices still rise but more slowly. Moving from 110 to 104.5 means −5% inflation: deflation.
In the results above, “GDP deflator growth” is inflation measured across domestic production. “Consumer basket price index growth” is inflation in this fixed consumer basket. They need not agree.
4. GDP, unemployment and recessions
The three commonly watched indicators are real GDP growth (output), inflation (prices) and unemployment (jobs). The unemployment rate is unemployed people actively seeking work as a share of the labor force, not the entire population. A rising rate can signal weakness, but no fixed combination of these three numbers automatically establishes a recession.
Check the two-quarter rule of thumb
Use three consecutive quarterly real GDP levels to calculate two changes. This example is separate from the annual economy above. For real data, use comparable, seasonally adjusted real GDP levels from the same publisher and release.
Quarter 2: -1% · Quarter 3: -1.01% (quarter over quarter, not annualized).
Two consecutive contractions: the technical recession rule of thumb is met.This does not determine whether an economy is in recession. NBER dates US recessions using the breadth, depth and duration of declines across indicators such as employment, real income, production and spending. Zero growth does not count as a contraction. Deflation is a price change, not a recession test.
Definitions and sources
GDP measures final domestic production. The GDP deflator covers domestic output; CPI measures prices of consumer purchases, including imports. Their coverage and weights differ. Our small fixed basket illustrates CPI arithmetic, not the full official methodology.
Deflation means a falling price level. Disinflation means inflation slows while prices may still rise. Neither is the same as a recession, which concerns a broad decline in economic activity.
- BEA: implicit price deflators
- BLS: consumer price inflation
- NBER: recession dating and the limits of the two-quarter rule