Difference Between Nominal GDP and Real GDP

Difference Between Nominal GDP and Real GDP

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Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Apr 30, 2024 18:01 IST

The main difference between nominal and real GDP is that nominal GDP measures a country’s economic output using current market prices. While real GDP adjusts for inflation or deflation, providing a more accurate representation of a country’s actual economic growth.

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Gross Domestic Product (GDP) measures the total value of goods and services produced within a country’s borders over a specified period, typically a year. It is a key economic indicator that helps to measure a country’s economic performance. GDP can be categorized into Nominal GDP and Real GDP. Nominal and Real GDP are important economic indicators that help policymakers and economists analyse and monitor an economy’s performance.

Nominal GDP is commonly used for international comparisons, reflecting the current market values of goods and services. However, Real GDP is a more accurate measure of a country’s economic output, as it accounts for the impact of inflation on the economy. Let’s understand the difference between these two important economic concepts.

Table of Content

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Comparison Table: Nominal GDP and Real GDP

The difference between Nominal GDP and Real GDP can be explained based on the following parameters:

  Nominal GDP Real GDP
Meaning Nominal GDP stands for Nominal Gross Domestic Product. It is the total value of goods and services a country produces in a given period, measured at current market prices. Real GDP stands for Real Gross Domestic Product. It is the total value of a country’s goods and services in a given period, adjusted for inflation.
Complexity The calculation of nominal GDP is easy. The calculation of real GDP is a bit tricky. 
Based On Nominal GDP is calculated based on the current market prices of goods and services produced.  Real GDP is calculated based on the base year’s market price.
Inflation Does not consider inflation. Consider inflation
Comparison with earlier GDPs It can be compared with the previous GDPs It can be compared with the previous financial years.
Economic Growth We can easily analyze economic growth based on nominal GDP. Using the real GDP, we can easily examine economic growth.
Value of GDP Due to the current market changes, its value is much higher. Since the base year’s market price is considered, the value is much lower.
Popularity Less popular More popular

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What is Nominal GDP?

Nominal GDP stands for Nominal Gross Domestic Product. It measures the total value of all goods and services a country produces within a specific period. It is usually a year, at current market prices, without any adjustment for inflation.

Nominal GDP = (Price of Goods and Services in the Current Year) x (Quantity of Goods and Services Produced in the Current Year)

In other words, it is calculated by multiplying the current market prices of all the goods and services produced in a country within a specific period by the quantity of those goods and services.

It provides a snapshot of the economy’s performance at the current market prices but does not show the effects of inflation or deflation on the economy.

Comparing the nominal GDP of different countries is common, as it reflects the current market value of goods and services. However, it may not accurately compare economic performance, especially if inflation has changed significantly.

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What is Real GDP?

Real GDP stands for Real Gross Domestic Product. It measures the total value of all goods and services a country produces within a specific period. Usually, a year is adjusted for inflation. We calculate adjusting the nominal GDP for changes in the general price level using a price index, such as the Consumer Price Index (CPI). The resulting figure represents the real value of goods and services produced in the current year, adjusted for inflation.

Real GDP = (Price of Goods and Services in a Base Year) x (Quantity of Goods and Services Produced in the Current Year)

The purpose of calculating Real GDP is to provide a more accurate picture of a country’s economic performance over time by considering the effects of inflation or deflation on the economy. Inflation reduces the purchasing power of money. So if the value of goods and services produced in a given period increases solely because of inflation, then it does not represent a real increase in the economy’s output.

It is a more accurate measure of a country’s economic output than nominal GDP. Because it accounts for the impact of inflation on the economy and allows for more meaningful comparisons of economic performance over time.

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Points of Difference

Inflation: Nominal GDP is calculated at current market prices without any adjustment for inflation. Conversely, Real GDP considers changes in the general price level by adjusting for inflation. This means that Nominal GDP may overestimate the true economic growth if prices have increased significantly over time.

Purchasing Power: Real GDP measures the actual quantity of goods and services produced by a country, considering the effects of inflation. While Nominal GDP does not adjust for inflation. Therefore, Real GDP provides a more accurate measure of the country’s economic output and purchasing power.

Economic Growth: Real GDP provides a more accurate measure of economic growth over time because it adjusts for general price-level changes. Nominal GDP may show an increase in economic growth. But it could be due to an increase in prices rather than an actual increase in production.

International Comparisons: Nominal GDP is commonly used for international comparisons. Because it reflects the current market values of goods and services. However, Real GDP is a more accurate measure of economic performance because it adjusts for inflation. Also, it better compares the true economic output of different countries.

Real GDP and Nominal GDP differ based on their treatment of inflation and ability to measure purchasing power. Also, it offers accuracy in measuring economic growth and usefulness for international comparisons.

Conclusion

Understanding the difference between these two concepts is important for interpreting economic data and making informed decisions about economic policy. Nominal GDP indicates the current value of a country’s economic output. Still, it does not adjust for inflation or provide a true measure of the actual quantity of goods and services produced. An accurate measure of a country’s economic performance is to adjust its nominal GDP for inflation.

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FAQs

What is Real GDP?

Real GDP stands for Real Gross Domestic Product. It is a measure of a country's economic output that takes into account the impact of inflation. Real GDP is calculated by adjusting the nominal GDP for changes in the general price level using a price index, such as the Consumer Price Index (CPI). This adjustment allows for a more accurate measurement of the actual quantity of goods and services produced in a given period, eliminating the effects of inflation.

What is Nominal GDP?

Nominal GDP stands for Nominal Gross Domestic Product. It measures the total value of goods and services produced within a country's borders without adjusting for inflation. Nominal GDP is calculated by multiplying the current market prices of all goods and services produced within a specific period by the quantity of those goods and services. It provides a snapshot of the economy's performance at current market prices.

What is the difference between Real GDP and Nominal GDP?

The key difference between Real GDP and Nominal GDP is the adjustment for inflation. Real GDP accounts for changes in the general price level and provides a more accurate measure of a country's economic output. On the other hand, Nominal GDP does not adjust for inflation and reflects the current market values of goods and services. Real GDP allows for meaningful comparisons of economic performance over time, while Nominal GDP is more commonly used for international comparisons.

Why is Nominal GDP used for international comparisons?

Nominal GDP is often used for international comparisons because it reflects the current market values of goods and services produced in a country. It provides a snapshot of the economic size and market value of an economy. However, it is important to note that Nominal GDP may not accurately compare economic performance across countries if inflation rates differ significantly. In such cases, Real GDP, which adjusts for inflation, is a more appropriate measure for international comparisons.

Can Nominal GDP be higher than Real GDP?

Yes, Nominal GDP can be higher than Real GDP. This situation occurs when there is inflation, causing the prices of goods and services to increase over time. If the increase in Nominal GDP is solely due to rising prices, without a corresponding increase in the quantity of goods and services produced, Real GDP will be lower. Real GDP provides a more accurate measure of economic growth by accounting for changes in the general price level.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio