Gross Domestic Product is all the stuff that makes up our economy. It comes in two flavors - real, which is the underlying actual goods and services of the economy, and nominal, which is those goods and services plus changes in price.
One burger is real but a nominal burger is the same burger as last year but now it costs more. As such, inflation is the key ingredient into nominal measurement. And, inflation is kind of a force to be reckoned with once again. So we need to account for it.
Since we are trying to build out more forecasts, we need tools to link ideas together. A simple one is that real GDP combined with inflation can give us nominal GDP. Fortunately, we can build a pretty simple model to give ourselves a nice equation to link these three ideas.
In the chart below, the fit of the model is judged by the fit of the dots (which are actual observations) to the line. They seem to fit pretty well, giving us confidence that this tool will work reasonably well for us:
It may not look like much now but we will get to use this tool tomorrow when we do our Forecast Friday update!
Have a question you want to ask or a topic you’d like to see covered? Let me know!
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