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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