8 Major Difference Between Real And Nominal GDP (With Chart)

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From the word gross domestic product (GDP), the word ‘’gross’’ means that the GDP measures production regardless of the various uses to which the product can be put whereas ‘’Domestic’’ means that the measurement of GDP contains only products from within its borders. Therefore, gross domestic product (GDP) can be described as the aggregate of all value of all the goods and services produced within a country during a specific period of time.

What Is Nominal GDP?

The nominal GDP is a measure of value of all final goods and services produced within a country’s borders at current market prices. Also known as ‘’current dollar GDP’’ or chained dollar GDP’’. In other words, it doesn’t strip out inflation or the pace of rising prices. All goods and services accounted for in nominal GDP are valued at the prices that are actually sold for in that year.

Given that nominal GDP isn’t adjusted for inflation, it doesn’t necessarily accurately reflect the economic strength of an economy over time, because the increase may be due to inflated prices rather than increased output. This means that it is possible for a country’s nominal GDP to rise due solely due to inflation even as their output drops.

What You Need To Know About Nominal GDP

  •  Nominal Gross Domestic Product (GDP) takes the current market price to calculate the GDP of the year.
  • It is based on current market price.
  • Real GDP take inflation or deflation of the country during the specified time period into consideration.
  • Analyzing economic growth through nominal GDP is typically easier when compared to doing so through real GDP.
  • Nominal GDP is easier to calculate because it’s the current market prices that used in calculation.
  • Nominal GDP is more appropriate for comparisons across different quarters of a year.
  • Nominal GDP is much higher in value since the current market prices are taken into consideration.
  • Nominal GDP is not very popular among economists because it is not detailed in its approach.

What Is Real GDP?

Real GDP is a measurement of economic output that reflects the value of all goods and services produced by an economy in a given year (expressed in base-year prices) and is often referred to as constant-price GDP, inflation-corrected GDP  or constant dollar GDP.  Essentially, real GDP measures a country’s total economic output, adjusted for price changes. 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. Real GDP will either use prices in a base year or a GDP Deflator to account for the changes in price.

Real GDP accounts for price changes that may have occurred due to inflation. In other words, real GDP is nominal GDP adjusted for inflation. If prices change from one period to the next but actual output does not, real GDP would remain the same. Real GDP reflects changes in real production. If there is no inflation or deflation, nominal GDP will be the same as Real GDP.

To calculate real GDP, we must discount the nominal GDP by a GDP deflator. The GDP deflator is a measure of the price levels of new goods that are available in a country’s domestic market. It includes prices for businesses, the government and private consumers. The GDP deflator essentially removes inflation from the equation and enables us to compare the GDP of a recent year to the GDP of a target or base year.

What You Need To Know About Real GDP

  •  Real Gross Domestic Product (GDP) takes the market price of the base year and the quantity produced for the current year and then finds out the GDP of the year.
  • It is based on base year’s market price.
  • Nominal GDP does not take inflation or deflation of the country during the specified time period into consideration.
  • Analyzing economic growth through real GDP is comparatively not easier. 
  • Real GDP is more complex to calculate since it requires analysis of the base year market price of the current economic output in finding out the value.
  • Real GDP is more appropriate for comparison of economic performance across years and across countries.
  • Real GDP is much lower in value since the base market price is taken into account.
  • Real GDP is popular among economists because it is very much detailed in its approach.

Difference Between Real And Nominal GDP In Tabular Form

BASIS OF COMPARISON REAL GDP NOMINAL GDP
Description Real Gross Domestic Product (GDP) takes the market price of the base year and the quantity produced for the current year and then finds out the GDP of the year.   Nominal Gross Domestic Product (GDP) takes the current market price to calculate the GDP of the year.  
Basis It is based on base year’s market price.   It is based on current market price.  
Inflation/Deflation Nominal GDP does not take inflation or deflation of the country during the specified time period into consideration.   Real GDP take inflation or deflation of the country during the specified time period into consideration.  
Economic Growth Analysis Analyzing economic growth through real GDP is comparatively not easier.    Analyzing economic growth through nominal GDP is typically easier when compared to doing so through real GDP.  
Calculation Real GDP is more complex to calculate since it requires analysis of the base year market price of the current economic output in finding out the value.   Nominal GDP is easier to calculate because it’s the current market prices that used in calculation.  
Suitability Real GDP is more appropriate for comparison of economic performance across years and across countries.   Nominal GDP is more appropriate for comparisons across different quarters of a year.  
Numerical Value Real GDP is much lower in value since the base market price is taken into account.   Nominal GDP is much higher in value since the current market prices are taken into consideration.  
Popularity Real GDP is popular among economists because it is very much detailed in its approach.   Nominal GDP is not very popular among economists because it is not detailed in its approach.