Differences between Nominal GDP and Real GDP
Nominal GDP vs. Real GDP[edit]
Nominal gross domestic product (GDP) and real GDP are two key measures of a country's economic output.[1] The primary distinction between them is that real GDP is adjusted for inflation, whereas nominal GDP is not.[2] This means that nominal GDP is calculated using current market prices, while real GDP is calculated using constant prices from a designated base year.[3]
Nominal GDP reflects the total value of all goods and services produced in an economy at the prices of that specific period.[4][5] An increase in nominal GDP can be due to an increase in the actual production of goods and services, an increase in their prices, or a combination of both. Because it includes changes in price levels, nominal GDP can sometimes give a misleading impression of economic growth.
Real GDP, in contrast, provides a measure of economic output that has been adjusted for the effects of inflation or deflation. By using constant prices from a base year, real GDP allows for a more accurate comparison of economic output over different time periods, as it reflects changes in the actual volume of goods and services produced.[3] Economists and policymakers often focus on real GDP when assessing economic growth because it provides a clearer picture of the change in a country's production and standard of living.
To convert nominal GDP to real GDP, economists use a price index known as the GDP deflator. The formula is: Real GDP = Nominal GDP / (GDP Deflator / 100).
Comparison Table[edit]
| Category | Nominal GDP | Real GDP |
|---|---|---|
| Definition | Measures the total value of goods and services at current market prices.[4] | Measures the total value of goods and services at constant base-year prices.[3] |
| Inflation | Is not adjusted for inflation or deflation.[2] | Is adjusted for inflation and deflation. |
| Prices Used | Current year prices.[4] | Constant prices from a base year.[3] |
| Indication of Growth | An increase can reflect a rise in production, a rise in prices, or both. | An increase indicates a rise in the actual quantity of goods and services produced. |
| Purpose | Useful for comparing different components of the economy in the same year.[4] | Better for comparing economic output across different years and assessing true economic growth. |
| Calculation | C + I + G + (X - M) using current prices.[4] | (Nominal GDP / GDP Deflator) x 100. |
References[edit]
- ↑ "capital.com". Retrieved February 10, 2026.
- ↑ 2.0 2.1 "corporatefinanceinstitute.com". Retrieved February 10, 2026.
- ↑ 3.0 3.1 3.2 3.3 "khanacademy.org". Retrieved February 10, 2026.
- ↑ 4.0 4.1 4.2 4.3 4.4 "khanacademy.org". Retrieved February 10, 2026.
- ↑ "study.com". Retrieved February 10, 2026.
