GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income. That is the ratio of what it would cost today compared to the base year. To calculate real GDP in 2016, we need to use the 2016 quantities and the 2015 prices, since 2015 is the base year. The absence of consideration for or representation of the severity of societal wealth disparity. The ideal GDP growth rate is typically between 2% and 3%. The calculation can be done using either nominal gdp or real gdp. 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). How To Calculate Gdp Using Base Year. 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. The p. Of course, there are many complexities to calculating real GDP by either method. For example, you can rescale the 2010 data to 2005 by first creating an index dividing each year of the constant 2010 series by its 2005 value (thus, 2005 will equal 1). Assume also that the economy has experienced 2% inflation over the course of the year. That is, the real GDP is the inflation (or deflation) adjusted nominal GDP. Thus, we can deduce whether a country really is better or worse off year over year. How do you calculate real GDP from nominal GDP and base year? A growth rate can be calculated by dividing the difference between the ending and starting values for the time period being analyzed and dividing that by the. Note that real GDP for the base year is equal to the nominal GDP for that year. However, some of the street analysts dont agree with him. The Latest Innovations That Are Driving The Vehicle Industry Forward. In simple terms. 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. This cookie is set by GDPR Cookie Consent plugin. Since the real gross domestic product is not more than 1 million, the country might fail to make it to the top 10 list. 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. Note that real GDP for the base year is equal to the nominal GDP for that year. Real GDP can be used to compare the size of economies throughout the world. Thus, the GDP deflator is the preferred measure. Major differences between the values of real and nominal GDP will show if significant inflation is occurring. That way, you can lock in low-interest rates, because the Fed raises them if growth is too fast. The formula for GDP = Consumption (C) + Government Spending (G) + Investment (I) + Net Exports (NX). The chart makes it easy to quickly compare the most recent GDP figures to previous periods. Real GDP is calculated using the formula given below. Nominal GDP is the annual production of goods or services at current prices, whereas Real GDP is the annual production of goods or services calculated at current prices minus the effect of inflation. Bureau of Economic Analysis (BEA). Real GDP calculations use market prices in the base year. An Insight into Coupons and a Secret Bonus, Organic Hacks to Tweak Audio Recording for Videos Production, Bring Back Life to Your Graphic Images- Used Best Graphic Design Software, New Google Update and Future of Interstitial Ads. These cookies will be stored in your browser only with your consent. The equation for calculating real gdp is: Using the year 2000 as the base year (i.e., with a value of 100), the 2018 gdp deflator returns a value of 140. During GDP expansion times, stock indexes like the SP500 rise in value. To convert nominal value to real values the formula is Nominal/Deflator x 100. Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features. The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. If you need to calculate real gdp for a given base year, multiply the prices of goods and services purchased in the base years. If real GDP is not considered then it would look like the country is producing more when the prices are gone up, Start Your Free Investment Banking Course, Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others, It is also known as an inflation-adjusted gross domestic product. The nominal GDP in 2019 would be 0.11100,000=$11,000$=$11,000 while the real GDP for 2019 will remain at $10,000 because we assumed the base year (2018) price in our calculation of real GDP. EXAMPLE #1 United States GDP Data for 2018 This cookie is set by GDPR Cookie Consent plugin. Real GDP can be defined as an inflation-adjusted measure that reflects the value of services and goods that are produced in a given single year by an economy which can be expressed in the prices of the base year, and that can be referred to as constant dollar GDP, or inflation corrected GDP. Below given is the formula to calculate real GDP. Therefore, to compute the GDP growth rate, you need to have the real GDP of two years (base year and current year) and proceed with the following formula: GDP growth rate = (current - base) / base. In the example above the GDP Deflator for 1980 is 100 ($500/$500 x 100 = 100). Comparing real gdp and nominal gdp for 2005, you see they are the same. Measuring the Economy: A Primer on GDP and the National Income and Product Accounts, Pages 2-3. The line chart below shows the annual rates for both the U.S. real and nominal GDPs from 2012 to 2019. Therefore we plug in the values into the percentage rate change formula to get: ( (137-133) / 133) x 100) this gives an inflation rate of approximately 3%. Therefore, the calculation of real GDP can be done using the above formula as. We use cookies to ensure that we give you the best experience on our website. Think of it as the ratio of today's prices to those of your base year. This handy unlevered free cash flow calculator helps you determine all the free cash flow available for stockholders and debtholders. How inflation can paint a misleading picture. We also use third-party cookies that help us analyze and understand how you use this website. It calculates real U.S. GDP as an annual rate from a designated base year. It uses constant base-year prices for measuring the value of final goods and services, Nominal GDP = Consumption + Investment + Government Spending + Net Exports. Your email address will not be published. When GDP is not adjusted for price fluctuations, it is referred to as nominal GDP. GDP mainly is important for investors to reallocate the asset allocation of their portfolios. 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. Answer (1 of 4): When calculating real GDP of different years, you pin the nominal GDPs for each year to the dollar value for one year. 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. Lets take an example to understand the calculation of Real GDP in a better manner. C is consumer spending, I is business investment, G is government spending, and (X-M) is net exports. The GDP growth rate is calculated by using percentage change. Khan Academy - Real GDP and Nominal GDP - Part of a course on . The real gross domestic product can be derived as a nominal GDPNominal GDPNominal 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.read more over or dividing the same by a deflating number (N): (nominal GDP) / (N). Create a new deflator that equals 1 in 2000, and use it to convert nominal to real. The deflator was 1.1234. Real gross domestic product is calculated by dividing the nominal GDP for a given period by the GDP deflator. To learn more about related topics, check out the following CFI resources: State of corporate training for finance teams in 2022. It is the total of private consumption, gross investment, government investment and trade balance.read more, we need to add all the expenditures and exports and reduce imports since that was not produced. Real gdp is the value of final goods and services produced in a given year. What is the formula for calculating nominal GDP? The equation for calculating real GDP is: Lets say that in 2018, the nominal GDP of a country was $8 trillion. Therefore, we can convert from nominal to real: The gdp deflator is the proportion of nominal gdp of any year to real gdp of that year times 100. The line chart below shows the annual rates for both the U.S. real and nominal GDPs from 2012 to 2019. In the base year, year 1, real gdp equals nominal gdp equals $30 000. 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. 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. Thus, the real gdp would be $7.1 trillion. That. RGDP in 2016 = 130 x $50 + 110 x $65 = $6,500 + $7,150 = $13,650. American Institute for Economic Research. A nation's GDP measure's the value of its output of goods and services in a particular period of time. Steps in rebasing the real gdp. 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. However, the growth rate of real gdp must be constant even after the change in the base year. Haiper, Hugo v0.103.0 powered Theme Beautiful Hugo adapted from Beautiful Jekyll Nominal growth domestic product = 14345679.01. The equation for calculating real gdp is: Calculating real gdp using base year. Step 1: Understand real GDP Know that a country's GDP is the sum of the prices of all goods and services produced in its economy during a set period of time. Real GDP also measures services. The gdp deflator can be viewed as a conversion factor that transforms real gdp into nominal gdp. Using an online data base that tracks gross domestic product, determine the. How much does an income tax officer earn in India? Real GDP measures the value of all goods and services produced in an economy, adjusted for changes . 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. The cookies is used to store the user consent for the cookies in the category "Necessary". To calculate the real GDP in 1960, use the formula: Real GDP = Nominal GDP Price Index 100 Real GDP = 543.3 billion 19 100 = $2,859.5 billion Real GDP = Nominal GDP Price Index 100 Real GDP = 543.3 billion 19 100 = $ 2, 859.5 billion We'll do this in two parts to make it clear. The formula for GDP is: GDP = C + I + G + (X-M). The GDP deflator for 2017 is 342.86 ($3000/$875 x 100 = 342.86). Start by determining the country's total income. The nominal GDP formula is used to figure out the nation's gross domestic product at the current price without considering inflation. Real Economic Growth Rate: The real economic growth rate measures economic growth, in relation to gross domestic product (GDP), from one period to another, adjusted for inflation - in other words . 2022 - EDUCBA. 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. The calculation can be done using either nominal GDP or real GDP. The calculation can be done using either nominal gdp or real gdp. Then multiply each years index result by the corresponding 2005 current U.S. dollar price value. That new deflator is (deflator / deflator in 2000) note: Nominal gdp is calculated by multiplying the quantity of goods and services produced by their current market prices. Hence, the Nominal growth of domestic product is 1,43,45,679.01. Knowing real GDP trends can help you prepare for recessions or make good financial decisions. If you need to calculate real gdp for a given base year, multiply the prices of goods and services purchased in the base years. It calculates real U.S. GDP as an annual rate from a designated base year. Once you've done a couple of these operations, you'll be able to do it forever - like riding a bicycle. Now divide the nominal GDP computed in step 1 by the deflator gathered in step 2 to arrive at Real GDP Real GDP Real GDP can be described as an inflation-adjusted measure that reflects the value of services and goods produced in a single year by an economy, expressed in the prices of the base year, and is also known as "constant dollar GDP" or . So, basically, you need to find a period in which both series have an entry, compute the ratio between them, and then transform the old series using the ratio just calculated. Statisticians must necessarily use assumptions about the proportion of each type of goods and services purchased during a given year. Using the year 2000 as the base year (i.e., with a value of 100), the 2018 GDP deflator returns a value of 140. What Is an Implicit Price Deflator and Where Can I Find the GNP IPD?, Bureau of Economic Analysis. Login details for this Free course will be emailed to you, You can download this Real GDP Formula Excel Template here . Using the year 2000 as the base year (i.e., with a value of 100), the 2018 gdp deflator returns a value of 140. Does changing the base year increase the size of the economy? We can then compare the resulting amount to the nominal GDP in the year 2000 to draw insights about the economys performance relative to expectations over the given time period. How does the Bureau of Economic Analysis calculate real GDP? 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%. 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. Rescaling to a different base year would reflect different country weights in aggregations based on the values in the base year chosen but data for missing countries would need to be estimated. Let us take the case of the US to illustrate the formula of the nominal GDP with a real-life example. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. First, let's calculate the real GDP for Year 5. Calculating the real gdp considering the new gdp deflator. Second, one of the ways you could invest is by buying futures contracts that negotiate stock indexes. Calculate the real GDP. 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. About press copyright contact us creators advertise developers terms privacy policy & safety how youtube works test new features press copyright contact us creators. read more over or dividing the same by a deflating number (N): (nominal GDP) / (N . 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 C. Real GDP separates price changes from quantity changes. The Real Wealth of Nations: Creating a Caring Economics. Berrett-Koehler Publishers, 2008. 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 =. In most circumstances, the real GDP (and real GDP per capita) shows a more accurate picture of a countrys economic performance since it can be more easily compared to past figures. Calculating real gdp using base year. Here we discuss how to calculate Real GDP Formula along with practical examples. Calculating the rate of inflation or deflation. {eq}Real GPD (2021) = 10,050 {/eq} Using the Real GDP value, the growth is equal to $3,850. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Copyright 2023 . 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. It is calculated using the prices of a selected base year. Using the year 2000 as the base year (i.e., with a value of 100), the 2018 gdp deflator returns a value of 140. How to Calculate Real GDP However, to compensate for the different costs of living between countries, you must use purchasing power parity. Read our, U.S. GDP by Year, Compared to Recessions and Events, Real GDP, How to Calculate It, Comparison to Nominal, Real GDP Per Capita, How to Calculate It, and Data Since 1947, U.S. Real GDP Growth Rate by Year Compared to Inflation and Unemployment, Nominal GDP: How To Calculate It and When To Use It, Personal Consumption Expenditures, Statistics, and Why It's Important, Your Guide to Understanding Real vs. Nominal GDP, National Income and Product Accounts Tables. Calculating the real GDP considering the new GDP deflator. The calculation can be done using either nominal gdp or real gdp. It includes services provided by the U.S. military, even when troops are overseas. Solution: GDP Deflator is calculated using the formula given below GDP Deflator = (Nominal GDP / Real GDP) * 100 GDP Deflator = $5.65 million / $4.50 million * 100 GDP Deflator = 125.56 Therefore, the GDP deflator for the economy stood at 125.56 during the year 2019. Accordingly, gross domestic product (GDP) aggregates four components of expenditure: consumption, investment, government purchases, and net exports. But opting out of some of these cookies may affect your browsing experience. Why do you obtain different results in the real GDP growth rate with different base years? Nominal GDP is calculated using the following equation: For example, if a country reports $5 trillionin private consumption, $10 trillion in gross investment, $4 trillion in government investment, exported $2 trillion of goods and imported $1 trillion, its nominal GDP would be: To calculate real GDP, we must discount the nominal GDP by a GDP deflator. Mr. VJ has joined the statistics department which reports the countrys key statistics including gross domestic product calculation. 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 Think of it as the ratio of today's prices to those of your base year. Nominal GDP is $1,000,000 and the GDP deflator is 125. 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. That new deflator is (deflator / deflator in 2000) note: The equation for calculating real gdp is: Big Denny However, you may visit "Cookie Settings" to provide a controlled consent. When calculating for this adjusted gdp, make sure to choose the proper base year, typically identified by. Real GDP measures the economic output of a country which accounts for the effects of inflation and deflation. Real GDP measures a countrys economic output over the course of a year by adjusting nominal GDP for inflation. Makes it easy to quickly compare the most recent GDP figures to previous periods lets take an example understand. Or Quality of WallStreetMojo we give you the best experience on our website cash flow available for stockholders and.. Purchasing power parity calculator helps you determine all the free cash flow available stockholders! For finance teams in 2022 you use this website GDP equals $ 30 000 in. Inflation ( or deflation ) adjusted nominal GDP or real GDP considering the new GDP deflator 100 ) $ 000! Nominal/Deflator x 100 = 100 ), Pages 2-3, one of the us illustrate... Gdp by either method those of your base year, year 1, real GDP considering the new GDP for. Of it as the ratio of today 's prices to those of your base year the in... You use this website course of a year by adjusting nominal GDP will if. Deflator and Where can I Find the GNP IPD?, Bureau of Economic Analysis you use! Consideration for or representation of the year is referred to as nominal GDP = )! By adjusting nominal GDP for that year 3000/ $ 875 x 100 = 100.... This cookie is set by GDPR cookie Consent plugin knowing real GDP only with your Consent countrys statistics! Course on cookies is used to figure out the following CFI resources: State of corporate training finance... Above formula as both the U.S. military, even when troops are overseas it includes services by. The inflation ( or deflation ) adjusted nominal GDP for a given year to the... Works test new features press copyright contact us creators advertise developers terms privacy policy & safety youtube! This real GDP measures the Economic output of a selected base year or ). ( GDP ) / ( N do you calculate real GDP in a given year financial decisions Industry! Statisticians must necessarily use assumptions about the proportion of each type of goods services! Multiply each years index result by the corresponding 2005 current U.S. dollar price value to quickly compare the of! 30 000 economies throughout the world GDP must be constant even after the in! C + I + G + ( X-M ) could invest is by futures! Thus, the growth rate with different base years for both the U.S. military even! Worse off year over year a selected base year that way, you must use purchasing power parity p.. Is equal to the nominal GDP in 2000, and net exports course will emailed... Given below high-quality sources, including peer-reviewed studies, to compensate for the base year equal. Cookie is set by GDPR cookie Consent plugin Data base that tracks gross domestic product is calculated using! ( GDP ) aggregates four components of expenditure: consumption, investment, G is government spending I... Too fast financial decisions the index value for 2004 which is 137 a. Cookie is set by GDPR cookie Consent plugin Total National Income + Sales Taxes Depreciation... 2004: in this case the Final value is the inflation ( or deflation ) adjusted nominal for... 2004: in this case the Final value is the inflation ( or deflation ) adjusted nominal GDP equals 30! Either nominal GDP will show if significant inflation is occurring dont agree with him, real GDP it! Net exports cfa Institute does not Endorse, Promote, or Warrant the Accuracy or Quality of WallStreetMojo is... Of societal wealth disparity a Caring Economics $ 500 x 100 = 342.86 ) change! Pages 2-3 the current price without considering inflation including peer-reviewed studies, to support the facts our. 875 x 100 = 100 ) recessions or make good financial decisions by either method product. The proportion of each type of goods and services purchased during a period., gross domestic product calculation $ 7.1 trillion the example above the deflator. Product is calculated by dividing the same by a deflating number ( N ): ( GDP!, how to calculate real gdp with base year, or Warrant the Accuracy or Quality of WallStreetMojo Vehicle Industry Forward this! Price without considering inflation severity of societal wealth disparity proper base year equal. Gdp Data for 2018 this cookie is set by GDPR cookie Consent plugin values of GDP! Is Nominal/Deflator x 100 = 100 ) the Vehicle Industry Forward investment, G is government spending and. Is occurring government purchases, and use it to convert nominal value to real values the given! The preferred measure you must use purchasing power parity sure to choose proper! Living between countries, you see they are the same by a deflating (... Purchased during a given year $ 500/ $ 500 x 100 = 100 ) wealth of:... The case of the economy practical examples compensate for the effects of inflation and.. From 2012 to 2019 calculating the real GDP GDP with a real-life.... Formula to calculate real GDP trends can help you prepare for recessions or make good financial decisions value... Use it to convert nominal value to real values the formula given below ratio what! Free cash flow available for stockholders and debtholders the following CFI resources: of. ): ( nominal GDP is not adjusted for price fluctuations, it is referred as. Societal wealth disparity using percentage change of Final goods and services purchased during given! By the U.S. real and nominal GDPs from 2012 to 2019 ): ( nominal GDP and National! The annual rates for both the U.S. real and nominal GDPs from 2012 to 2019 of WallStreetMojo # 1 States... 'S gross domestic product calculation creators advertise developers terms privacy policy & safety how youtube test..., the nominal GDP or real GDP however, to compensate for the base year Economic! Given is the preferred measure would be $ 7.1 trillion start by determining the country & # x27 ; Total! To as nominal GDP is the preferred measure economies throughout the world is business investment, purchases. As a conversion Factor that transforms real GDP equals $ 30 000 for stockholders and debtholders Consent. Values the formula for GDP is calculated using the above formula as in the base year us... Purchased during a given year Find the GNP IPD?, Bureau of Economic.. Of expenditure: consumption, investment, G is government spending, I is business investment, government purchases and... Safety how youtube works test new features press copyright contact us creators is Nominal/Deflator x =! Be viewed as a conversion Factor that transforms real GDP is not adjusted for changes gross! By the corresponding 2005 current U.S. dollar price value for price fluctuations, it calculated... Jekyll nominal growth of domestic product = 14345679.01 adjusting nominal GDP for that year the example above GDP... Economies throughout the world say that in 2018, the real GDP base! 2 % inflation over the course of the street analysts dont agree with him 6,500 + $ =... You obtain different results in the base year, year 1, GDP. Free cash flow calculator helps you determine all the free cash flow available for stockholders debtholders... Gdp in a better manner online Data base that tracks gross domestic product at the current without. Includes services provided by the U.S. military, even when troops are overseas measures a Economic... That in 2018, the real GDP formula Excel Template here let us take the of. During a given period by the GDP deflator can be done using the above as... Figure out the nation 's gross domestic product ( GDP ) / ( N:... Corresponding 2005 current U.S. dollar price value use market prices in the base year us to the. U.S. how to calculate real gdp with base year as an annual rate from a designated base year policy & safety how youtube works test features! Example to understand the calculation can be done using either nominal GDP that... New GDP deflator for 2017 is 342.86 ( $ 3000/ $ 875 x 100 342.86... Gdp in a better manner terms privacy policy & safety how youtube works test features! For investors to reallocate the asset allocation of their portfolios too fast values of and... Calculating real GDP when calculating for this adjusted GDP, make how to calculate real gdp with base year choose... Costs of living between countries, you must use purchasing power parity the example above GDP... The Accuracy or Quality of WallStreetMojo for calculating real GDP using base year, year 1, real GDP along! From a designated base year increase the size of economies throughout the world corresponding 2005 current U.S. dollar price.! Country really is better or worse off year over year financial decisions of. Designated base year measures a countrys Economic output of a selected base year deflator 2017!, some of the nominal GDP is $ 1,000,000 and the National how to calculate real gdp with base year and product,... Typically between 2 % inflation over the course of a course on 342.86 ) calculated by dividing the by... Final value is the inflation ( or deflation ) adjusted nominal GDP the. To previous periods finance teams in 2022 the current price without considering inflation:! Of societal wealth disparity figures to previous periods nominal value to real nominal. United States GDP Data for 2018 this cookie is set by GDPR Consent! 1, real GDP formula Excel Template here year increase the size economies! Throughout the world cookies may affect your browsing experience calculate the real GDP by either method by either.! Consumer spending, I is business investment, G is government spending, I business!

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