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Economic Theory

Value added = Total sales +
+ Closing stock of finished and semi-finished goods –
– Total expenditure on raw materials and intermediate products –
– Opening stock of finished and semi-finished goods. (3.8)

Table 3.1 summarizes the relationships among all of the above

national income accounting concepts.

Table 3.1 – Relationship between National Income Concepts

4. Real and Nominal Gross Domestic Product
Economists call the value of goods and services measured at current
prices nominal GDP. Real GDP is the value of goods and services

measured using a constant set of prices:

Nominal GDP
Real GDP   100 %. (3.9)
Price Index

Nominal GDP is usually higher than real GDP because inflation is

typically a positive number. Nominal GDP is used when comparing
different quarters of output within the same year. When comparing the
GDP of two or more years, real GDP is used because, by removing the

effects of inflation, the comparison of the different years focuses solely on
volume.

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