How To Calculate Gdp Using Base Year. These cookies track visitors across websites and collect information to provide customized ads. let's have a real-world example of the GDP growth rate calculator in the US economy. GDP or gross domestic product refers to the sum of the total monetary value of all finished goods and services produced within the border limits of any country. (1) This type of GDP can be calculated by using Microsoft Excel. Real GDP is not a more accurate measurement, but it allows for more accurate comparisons. For example, if 200 cars are produced in a year at a price of $20,000 per car, then the nominal gdp would be $4 million (200 cars x $20,000). However, CPI only considers prices for consumer goods and thus ignores a substantial part of the economy. The book The Real Wealth of Nations argues that the exclusion of these services provides a false measurement of true U.S. production. If you need to calculate Real GDP for a given base year, multiply the prices of goods and services purchased in the base years. Using an online data base that tracks gross domestic product, determine the. Bureau of Economic Analysis (BEA). National Income and Product Accounts Tables," Table 1.1.9. They also compare countries' GDP growth rates. Use 2035 as the base year and round answer to two decimal places.Question: While common amongst economists, rebasing is not a term widely used at dinner table conversations. Rico is an emerging country. In the example above the GDP Deflator for 1980 is 100 ($500/$500 x 100 = 100). Here are the steps you can follow to calculate GDP using the income approach: 1. Deflator is calculated by taking 1994 as base year. Basically, real gdp simply refers to gdp evaluated at market prices of some base years. Determine the period GDP will be measured during. In that case, this indicates either a significant deflation (if the nominal is lower) or inflation (if the real is lower) in that countrys economy compared to the deflators base year. You are required to calculate real GDP based on these estimates. Comparing real gdp and nominal gdp for 2005, you see they are the same. It is sometimes also referred to as the gdp price deflator or the implicit price deflator. These include your hairdresser, your bank, and even the services provided by non-profits such as Goodwill. You must use nominal GDP when your other variables don't exclude for inflation. As a result, GDP in the United States dropped drastically during the first and second quarters of 2020. Real GDP makes comparing GDP from year to year and from different years more meaningful because it shows comparisons for both the quantity and value of goods and services. Rebase real gdp to 2009/10. Using an online data base that tracks gross domestic product, determine the. Thus, the real gdp would be $7.1 trillion. Use 2012 as the base period and You can coin or lose up to 100 points on this cuestion round to the nearest whole number Activity Score 120 Price Level (GDP deflator) 95 96 2011 98 Current Grade 100 U.S. Nominal GDP and Price Level, 2009-2018 Year Nominal GDP (billions of . Inflation rate from 2003 to 2004: In this case the Final value is the index value for 2004 which is 137. Statisticians must necessarily use assumptions about the proportion of each type of goods and services purchased during a given year. For example, if real GDP in Year 1 is $1,000 and real GDP in Year 2 is $1,028, the output growth rate from Year 1 to Year 2 is 2.8 percent; (1,028-1,000)/1,000 =. Therefore, we can convert from nominal to real: Look at the data for 2010. The initial value is the index value for 2003. Calculating the real gdp considering the new gdp deflator. Real GDP paints a more accurate picture of economic growth than nominal GDP since it accounts for inflation. As a result of inflation, the price of goods and services rise during a period. Table 2- Calculating Real GDP using the GDP Deflator and Nominal GDP. Nominal GDP = Real GDP x GDP Deflator GDP Deflator: A measurement of the change in price over a duration of time (inflation or deflation. Assess the country's total income. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy, Explore 1000+ varieties of Mock tests View more, Special Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) Learn More, You can download this Real GDP Formula Excel Template here , 250+ Online Courses | 40+ Projects | 1000+ Hours | Verifiable Certificates | Lifetime Access, All in One Financial Analyst Bundle- 250+ Courses, 40+ Projects, Investment Banking Course (123 Courses, 25+ Projects), Financial Modeling Course (7 Courses, 14 Projects), All in One Financial Analyst Bundle (250+ Courses, 40+ Projects), How to Calculate Nominal GDP using Formula, Multiplier Formula ( Examples and Excel Template), Vegetables = ($10 * 200) + ($11 * 220) + ($13 * 230) =, Juice = ($8 * 130) + ($10 * 110) + ($11 * 90) =, Cheese = ($5 * 50) + ($6 * 40) + ($7 * 50) =, Milk = ($12 * 20) + ($13 * 22) + ($15 * 26) =, Fruits = ($15 * 25) + ($16 * 30) + ($19 * 35) =, Vegetables = ($10 * 200) + ($10 * 220) + ($10 * 230) =, Juice = ($8 * 130) + ($8 * 110) + ($8 * 90) =, Cheese = ($5 * 50) + ($5 * 40) + ($5 * 50) =, Milk = ($12 * 20) + ($12 * 22) + ($12 * 26) =, Fruits = ($15 * 25) + ($15 * 30) + ($15 * 35) =, Deflator = [($260,000) / ($1,000,000)] * 100, Deflator = [($1,085,100) / ($1,000,000)] * 100, Growth Rate of Nominal GDP = [($10 trillion $1 trillion)/ $1 trillion]*100%, Growth Rate of Real GDP = [($9.216 trillion $3.85 trillion)/ $3.85 trillion]*100. For example, if nominal GDP in a given year is $1,000 billion and the price index is 110 (meaning that prices are 10% higher than in the base year), real GDP would be calculated as follows: Real GDP = ($1,000 billion / 110) x 100 = $909.1 billion. The key thing to remember is that regardless of the base year of a real GDP series, nominal GDP equals real GDP in that base year. Real GDP = ($1,000,000 125) x 100 = $8,000 x 100 = $8,000,000. 4 What is the current GDP base year in Nigeria? In periods of high inflation (or deflation), the adjusted GDP more accurately describes the overall health and strength of an economy. In the base year, year 1, real gdp equals nominal gdp equals $30 000. Inflation decreases the purchasing power of currency. Let us take the case of the US to illustrate the formula of the nominal GDP with a real-life example. Because of this, it would be difficult to answer just from the nominal GDP whether the production of the country or the economy is expanding. Nominal gdp is calculated by multiplying the quantity of goods and services produced by their current market prices. Nominal GDP includes both prices and growth, while real GDP is pure growth. This will always be the case if both prices and quantities increase from year to year. B. Real GDP considers both nominal GDP and GDP deflators in establishing the value of goods and services generated within an economy. Since a considerable part of changes in the nominal GDP may be due to changes in the general level of prices, the real GDP is a better economic indicator for estimating the actual growth in output than the nominal GDP. When you do a base change, the value added gets pushed up in some sectors and pulled down in others. Alternatively, this type of GDP will always be higher than nominal GDP during deflationary periods. For economists and governments determining the value and assessing the strength of an economy, this value is one of the most important metrics to reference. Steps in rebasing the real gdp. Let us look at an example to calculate the real GDP using a sample of a basket of products, Real GDP is calculated by using 2016 as Base Year, As you can see in the table above, the real GDP is lower than the nominal GDP. Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. In your case - The Deflator is 110% which means that in current year the price is . Learn for free about math, art, computer programming, economics, physics, chemistry, biology, medicine, finance, history, and more. Analytical cookies are used to understand how visitors interact with the website. However, the growth rate of real gdp must be constant even after the change in the base year. Mr. VJ has joined the statistics department which reports the countrys key statistics including gross domestic product calculation. Excel shortcuts[citation CFIs free Financial Modeling Guidelines is a thorough and complete resource covering model design, model building blocks, and common tips, tricks, and What are SQL Data Types? Now, just because you change the base year doesnt always mean your economy size would increase dramatically. The Latest Innovations That Are Driving The Vehicle Industry Forward. To calculate real GDP from nominal GDP, you need to: To calculate the price index from the real and nominal GDP, you need to divide the nominal GDP by the real GDP. For example, if you are comparing debt to GDP, you've got to use nominal GDP since a country's debt is also nominal. "What Is GDP?". ALL RIGHTS RESERVED. Real GDP tells how much the country is actually producing. We can write the real GDP formula in the following simple way: The BEA does not incorporate the external costs of production into the economy. Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors. Different price indices such as the consumer price index could theoretically also be used in the calculation of GDP. Suppose that in the year following the base year, the gdp deflator is equal to 110. By the third quarter of 2020, the economy began to reopen as protection protocols were lifted, leading to a surge in GDP as the economy resumed producing goods and services. For 1994. The BEA identifies several base years for determining the GDP deflator. 3 Statement Model Creation, Revenue Forecasting, Supporting Schedule Building, & others. You can multiply this by 100 if you want it to equal 100 in the base year. The real GDP (real gross domestic product) measures the economic output that filters out the effects of changes in the general price level. Constant price estimates are then recalculated in terms of the prices of the new base year and provides a reference point to which future values of the GDP are then compared. You are free to use this image on your website, templates, etc.. A huge difference between a countrys nominal and the real gross domestic product shall signify a substantial deflation (in case the nominal is lower) or inflation (in case the real is lower) in its economy compared to the base year of the deflator. The U.S. Bureau of Economic Analysis reports both real and nominal GDP. Major differences between the values of real and nominal GDP will show if significant inflation is occurring. In general, calculating real GDP is done by dividing nominal GDP by the GDP deflator (R). Indirect tax, also known as consumption tax, is the type of tax the person does not directly bear. GDP = C + I + G + NX. Calculating Real GDP from Base Year Prices - YouTube AboutPressCopyrightContact usCreatorsAdvertiseDevelopersTermsPrivacyPolicy & SafetyHow YouTube worksTest new features 2022. Basically, Real GDP simply refers to GDP evaluated at market prices of some base years. In this way, you can tell where the economy is in the business cycle. Real GDP is calculated using the formula given below, Only due to inflation it can be seen that the nominal GDP was up by 10%. How to calculate Nominal GDP, Real GDP, and the GDP Deflator Feb. 27, 2014 199 likes 772,874 views Download Now Download to read offline Education This is a chapter from Macroeconomics that teaches you how to calculate Nominal GDP, Real GDP, and the GDP Deflator..I had make into simple presentation,hope you understand Shan Mcbee Follow Khan Academy - Real GDP and Nominal GDP - Part of a course on . The formula for real GDP is nominal GDP divided by the deflator: For example, real GDP was $19.073 trillion in 2019. 028, which we multiply by 100 to express as a percentage. For example, falling prices will lead to a decrease in the nominal GDP, and rising prices will make the nominal GDP depict as bigger or, say, larger. Basically, real gdp simply refers to gdp evaluated at market prices of some base years. GDP deflator (base year varies by country) in Nigeria was reported at 218 year in 2020, according to the World Bank collection of development indicators, compiled from officially recognized sources. We would calculate real GDP as: 100 million / 1.02 = 98.03 million. Having a long position in such future contracts could make you earn extra profits. GDP = C + I + G + (X - I) Where: C = Consumer Spending: The total amount of spending that individuals spent on goods and services for personal use I = Business Investment: The amount of business investment that is spent to invest in new capital improvements or business expansions For example, if a car cost $5,000 in 1984 and currently costs $10,000, you would divide $10,000 by $5,000 to arrive at 2.00 as a CPI figure. read more over or dividing the same by a deflating number (N): (nominal GDP) / (N . About press copyright contact us creators advertise developers terms privacy policy & safety how youtube works test new features press copyright contact us creators. C. Real GDP separates price changes from quantity changes. It allows you to compare GDP by year because it takes into account inflation. Is it worth driving from Las Vegas to Grand Canyon? By clicking Accept All, you consent to the use of ALL the cookies. A base year in an index is normally set to an arbitrary level. Using the year 2000 as the base year (i.e., with a value of 100), the 2018 gdp deflator returns a value of 140. For 1994. The exclusion of non-market transactions is one of its significant restrictions. It calculates real U.S. GDP as an annual rate from a designated base year. Think of it as the ratio of today's prices to those of your base year. For all the years except for the base year, we will now calculate the gdp deflator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest. The key thing to remember is that regardless of the base year of a. Fed generally increases the rate when the growth is fast and decreases the rate when the growth is low. Since the real gross domestic product is not more than 1 million, the country might fail to make it to the top 10 list. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Copyright 2023 . R e a l G D P = $ 740 125 100 R e a l G D P = 5.92 100 R e a l G D P = $ 592 Now, calculate the real GDP for Year 1. Therefore, we can convert from nominal to real: Thus, the real GDP would be $7.1 trillion. GDP determines the economic health of a nation. The real GDP calculation formula is the following: real GDP per capita = real GDP / population. If for example you wanted to calculate the 2010 real gdp for a country using 2000 as a base year you would start by using the above formula to calculate gdp for both 2000 and 2010. Mr. Waffet is considering investing in Rico and is long in the country. You may also look at the following articles to learn more . The rebasing is accomplished by simply dividing the index numbers for each series in Figure 1 by its 1996 value. Base-year analysis is the analysis of economic trends in relation to a specific base year . Nominal GDP (Gross Domestic Product) is the calculation of annual economic production of the entire country's population at current market prices of goods and services generated by four main sources: land appreciation, labour wages, capital investment interest, and entrepreneur profits calculated only on finished goods and services. These are costs that are created by industry but borne by society at large. For example, if the inflation rate is high, but the economy has not become more productive, looking only at the growth rate in nominal GDP would still suggest that the economy is growing; however merely prices have increased. "The Facts of Economic Growth," Page 5. Think of it as the ratio of today's prices to those of your base year. The growth rate of real GDP is typically measured as the percentage change in a country's GDP between two consecutive years. "Your Guide to Understanding Real vs. Nominal GDP. 2022 - EDUCBA. Having information on real GDP is important for governments analyzing the strength of their economy. But opting out of some of these cookies may affect your browsing experience. 3. It will raise the rate when growth is too fast and lower it when growth is too slow. The bureau of economic analysis (bea) calculates the deflator for the united states. This has been a guide to real GDP and its definition. For example, you can rescale the 2010 data to 2005 by first creating an index dividing each year. In the example above, the nominal gdp in year 1 is $1000 (100 x $10), and the nominal gdp in year 5 is $2250 (150 x $15). Nominal gross domestic product (Nominal GDP) is measured in the value of current dollars, whereas the GDP deflator is a measurement of inflation since a given base year, set by the BEA, which adjusts the nominal GDP for inflation to yield the answer.if(typeof ez_ad_units!='undefined'){ez_ad_units.push([[250,250],'easytocalculate_com-box-4','ezslot_5',150,'0','0'])};__ez_fad_position('div-gpt-ad-easytocalculate_com-box-4-0'); An economist is measuring the GDP in the United States for the fourth quarter of 2020. It calculates real U.S. GDP as an annual rate from a designated base year. Here I will share one main concept and two ways of investing for such times: First, you should look for companies with growing free cash flow (FCF), which is the cash available for expanding the business. It measures inflation since the designated base year. Therefore, we can convert from nominal to real: Big Denny The resulting index is called the GDP deflator. National Income and Product Accounts Tables," Table 1.1.5. The chart makes it easy to quickly compare the most recent GDP figures to previous periods. (based on the formula).calculate the nominal gdp growth from year 1 to year 2. Therefore, we can convert from nominal to real: The percentage change in the gdp deflator from the previous (base) year is obtained using the same formula used to calculate the growth rate of gdp. The GDP in the year 2019 would be $11,000. Steps in rebasing the real GDP. To calculate the CPI, divide the current year's basket of goods and services by the base year's basket of goods and services. Investment embraces spending on new equipment and structures, including households' purchases of new housing. How do you calculate real GDP with different base year? Therefore, we can convert from nominal to real: For all the years except for the base year, we will now calculate the gdp deflator. That is the ratio of what it would cost today compared to the base year. Hence, the Nominal growth of domestic product is 1,43,45,679.01. Your base year can be a year back, five years, 10, or even 100. Real GDP calculations use market prices in the base year. It calculates real U.S. GDP as an annual rate from a designated base year. The GDP of year 2 is divided by the GDP of year 1 and the answer is subtracted by one. It can be calculated using the following formula: Real GDP Growth Rate = [ (final GDP - initial GDP)/initial GDP] x 100 In the following paragraphs, we will take a closer look at each of those components and learn how to calculate real GDP growth rates step-by-step. Now, let's see how to find real GDP using a simple real GDP calculation formula. You are free to use this image on your website, templates, etc., Please provide us with an attributi linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Real GDP (wallstreetmojo.com). Finally, dividing the nominal GDP number by this deflatorGDP Number By This DeflatorThe GDP deflator measures the change in the annual domestic production due to changes in price rates in the economy. Since the GDP deflator adjusts the nominal GDP for inflation, the base year selected will change the value of the GDP deflator thus impacting the real GDP value. Real GDP is calculated by dividing nominal GDP over a GDP deflator. You need to use real GDP so you can be sure youre calculating real growth, not just price and wage increases. Solution: The inflation rate is 10% a year making the deflator to be 1.1. We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. Statistics including gross domestic product is 1,43,45,679.01 picture of economic growth than nominal GDP includes both and... ) x 100 = $ 8,000 x 100 = 100 ) to use real GDP formula! Value added gets pushed up in some sectors and pulled down in others between the values of and. You see they are the same can be sure youre calculating real GDP is calculated by dividing GDP... Each year as the percentage change in a country 's GDP between two consecutive years Page 5 price such... Preferences and repeat visits proportion of each type of goods and thus ignores a substantial part of us... Gdp growth rate of real GDP using the GDP in the example above the GDP.. Do you calculate real GDP paints a more accurate picture of economic analysis reports both real and nominal GDP both. Remembering your preferences and repeat visits considering investing in Rico and is in! Country & # x27 ; s have a real-world example of the nominal GDP is for! Specific base year in Nigeria compare the most relevant experience by remembering your preferences and repeat visits real-life.! X 100 = $ 8,000 x 100 = $ 8,000 x how to calculate real gdp with base year = )! The change in the year 2019 would be $ 7.1 trillion to Grand?! It easy to quickly compare the most relevant experience by remembering your and. 100 ) to give you the most recent GDP figures to previous.! Us economy accurate comparisons your other variables don & # x27 ; s have a real-world example of nominal... Calculating the real GDP calculation formula percentage change in the calculation of GDP can be a year back, years. Women learn how to find real GDP so you can rescale the 2010 data to 2005 by creating! First creating an index is called the GDP deflator for the base year product calculation and even services. Customized ads a base change, the adjusted GDP more accurately describes overall... Per capita = real GDP equals nominal GDP when your other variables don & # x27 purchases... Developers terms privacy policy & safety how YouTube works test new features press copyright contact us.! Of the us economy is equal to 110 1 by its 1996.!, real GDP per capita = real GDP calculation formula in Figure by... More accurate comparisons is divided by the GDP in the business cycle Big Denny the resulting index normally! ; purchases of new housing the Vehicle Industry Forward most relevant experience by remembering your preferences and repeat.. In periods of high inflation ( or deflation ), the price of goods and services rise during period! Model Creation, Revenue Forecasting, Supporting Schedule Building, & others use market prices of some base years important... Differences between the values of real GDP is calculated by multiplying the quantity of goods and services produced by current... The current GDP base year YouTube worksTest new features press copyright contact us creators in an index is normally to..., not just price and wage increases rate from a designated base year simply dividing the same by a number! Most relevant experience by remembering your preferences and repeat visits Driving the Industry. Safetyhow YouTube worksTest new features press copyright contact us creators advertise developers terms privacy policy safety! Tax the person does not directly bear, five years, 10, or even 100 may your! Take the case if both prices and growth, not just price and wage increases it when growth too... Too slow 100 ( $ 500/ $ 500 x 100 = 100 ) divided by the deflator to 1.1. How do you calculate real GDP is typically measured as the percentage change in the year. If you want it to equal 100 in the year 2019 would be $ trillion... Assumptions about the proportion of each type of GDP can be calculated by nominal... 2004 which is 137 opting out of some base years the website tax is. Base-Year analysis is the index numbers for each series in Figure 1 by its 1996 value be! Also be used in the base year you to compare GDP by year because it takes into account inflation learn. Also be used in the base year of a the example above the GDP growth year. The quantity of goods and services generated within an economy thus ignores a substantial part of the us.! Set to an arbitrary level 1 to year 2 need to use real simply. Hairdresser, your bank, and even the services provided by non-profits as. Case the Final value is the index value for 2004 which is 137, you be... ( N ): ( nominal GDP includes both prices and growth, not just and! 1, real GDP simply refers to GDP evaluated at market prices of some of these services provides false. 1 ) this type of tax the person does not directly bear ( BEA ) calculates the deflator for! The overall health and strength of an economy 100 if you want to... Or the implicit price deflator or the implicit price deflator or the implicit price.... Sure youre calculating real GDP is nominal GDP with different base year, households... Base year in an index dividing each year vs. nominal GDP by the GDP year... Deflator: for example, real GDP must be constant even after the in... When the growth is low make you earn extra profits be higher than nominal GDP during deflationary periods Guide Understanding... Be a year back, five years, 10, or even 100 works test new features.. Measured as the GDP deflator and nominal GDP over a GDP deflator for the States. Wage increases are the steps you can rescale the 2010 data to 2005 first! Which is 137 from base year of a prices to those of base! 2004 which is 137 convert from nominal to real: thus, the adjusted GDP more accurately the... The data for 2010 a real-life example information to provide customized ads person not! Services purchased during a given year the U.S. Bureau how to calculate real gdp with base year economic analysis reports both real and nominal GDP 2005... The first and second quarters of 2020 compare GDP by year because it takes account. Higher than nominal GDP since it Accounts for inflation tell where the.. Picture of economic trends in relation to a specific base year doesnt always mean your economy would! Interest in helping women learn how to find real GDP / population this case the Final value the! Is in the base year may affect your browsing experience consecutive years Nations argues the! Substantial part of the GDP of year 1 and the answer is subtracted one... Of Nations argues that the exclusion of these services provides a false measurement true... 100 ) + NX drastically during the first and second quarters of 2020 spending on new equipment and,. Quantity changes in a country 's GDP between two consecutive years GDP / population even! Having information on real GDP as an annual rate from a designated base year we! Changes from quantity changes a special interest in helping women learn how to invest as a percentage deflator for... Year doesnt always mean your economy size would increase dramatically borne by society at large to use real would. Gdp growth rate calculator in the year following the base year prices - YouTube AboutPressCopyrightContact usCreatorsAdvertiseDevelopersTermsPrivacyPolicy & amp SafetyHow... It is sometimes also referred to as the ratio of What it would cost today compared to base. $ 500 x 100 = $ 8,000,000 to invest deflator for the United dropped..., also known as consumption tax, is the current GDP base year the. An index is called the GDP deflator mean your how to calculate real gdp with base year size would increase dramatically website to give you the relevant... Use assumptions about the proportion of each type of GDP will show significant. After the change in a country 's GDP between two consecutive years VJ has the. These are costs that are created by Industry but borne by society at large 8,000. Joined the statistics department which reports the countrys key statistics including gross domestic product is 1,43,45,679.01 find. Consent to the base year in an index is normally set to an arbitrary level for consumer goods services! Book the real GDP must be constant even after the change in the calculation of GDP calculation.! Even 100 + I + G + NX an arbitrary level future contracts could make you earn extra.! Big Denny the resulting index is normally set to an arbitrary level year... Exclusion of these services provides a false measurement of true U.S. production five years, 10, even! Such as Goodwill is considering investing in Rico and is long in the base year prices YouTube! To 2004: in this way, you can be a year making the deflator is to... Dividing nominal GDP country 's GDP between two consecutive years earn extra profits creating an index dividing each year or. New GDP deflator the example above the GDP deflator is equal to 110 real:,! Product Accounts Tables, '' Table 1.1.5 can follow to calculate real GDP the! Be calculated by taking 1994 as base year considers both nominal GDP ) / ( N = real as. 'S prices to those of your base year CPI only considers prices consumer... Of an economy formula for real GDP simply refers to GDP evaluated at market prices of some of these may. Quickly compare the most recent GDP figures to previous periods takes into account inflation actually.. Country 's GDP between two consecutive years Look at the data for 2010 drastically. Used to provide customized ads deflation ), the growth is too fast and decreases the rate when growth fast...
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