Real GDP vs Nominal GDP

Nominal GDP

Measures the total value of all goods and services produced in a country, using current prices.

Key Point of Nominal GDP

Does not adjust for inflation.

Purpose of Nominal GDP

Shows the current market value of an economy’s output.

Effect of Inflation on Nominal GDP

If prices rise, nominal GDP increases even if the quantity of goods and services produced stays the same.

Example of Nominal GDP Calculation

If a country produces 100 burgers at $6 each, nominal GDP = 100 × $6 = $600.

Real GDP

Measures the total value of all goods and services produced in a country, using prices from a base year.

Key Point of Real GDP

Adjusts for inflation by removing the effects of price changes.

Purpose of Real GDP

Gives a clearer picture of economic growth, showing if the economy is actually producing more or just facing rising prices.

Effect of Inflation on Real GDP

Inflation is accounted for, so changes in price do not affect Real GDP.

Example of Real GDP Calculation

In the same scenario with a base year price of $5, Real GDP = 100 burgers × $5 = $500.

Difference Between Nominal and Real GDP

Nominal GDP can increase due to higher prices, while Real GDP shows if there’s real growth by adjusting for inflation.

GDP Deflator

GDP Deflator = nominal GDP / real GDP.

Nominal GDP Calculation Formula

Nominal GDP = (Year 2 / Year 1) × Real GDP.

Real GDP Calculation Formula

Real GDP = Nominal GDP / (Year 2 / Year 1).

GDP Deflator Base Value

The deflator in a base year is always equal to 100.

Relationship of Output to Real GDP

When output decreases, Real GDP decreases.

Relationship of Prices to Nominal GDP

When prices increase, Nominal GDP increases.