Real GDP vs Nominal GDP

Real GDP and Nominal GDP

• Nominal GDP

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

  • Key Point: Does not adjust for inflation

  • Purpose: Shows the current market value of an economy’s output

  • Effect of Inflation: If prices rise, nominal GDP increases even if the quantity of goods and services produced stays the same

  • Example: In 2025, a country produces 100 burgers, and each burger costs $6

    • Nominal GDP = 100 burgers × $6 = $600

• Real GDP

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

  • Key Point: Adjusts for inflation by removing the effects of price changes

  • Purpose: Gives a clearer picture of economic growth, showing if the economy is actually producing more goods and services or just facing rising prices

  • Effect of Inflation: Inflation is accounted for, so changes in price do not affect Real GDP

  • Example (using the same scenario, with a base year price of $5): In 2025, the country still produces 100 burgers, but prices are higher, $6 per burger

    • Real GDP = 100 burgers × $5 (base year price) = $500

• Nominal GDP can go up simply because of higher prices (inflation), where as Real GDP shows if there’s real growth in the economy by adjusting for inflation

GDP Deflator

• GDP Deflator = nominal GDP/real GDP

• Nominal GDP = year 2/year 1 x Real GDP

• Nominal GDP/(year 2/year 1) = Real GDP

• deflator in a base is always equal to 100

• when output decreases, real gdp decreases

• when prices increase, nominal gdp increases