What Is the Difference Between Nominal and Real GDP?

GDP, or Gross Domestic Product, is one of the essential indicators determining the country’s economic health. The GPD is divided into two different types: real GDP and nominal GDP. For a better understanding of the global economy, it is necessary that one understands how both types are calculated and used.

Explanation:

GDP is the total market value of all goods and services provided in a country over a certain period of time. Gross Domestic Product is usually used to measure the purchasing power, economic growth of a country, and the overall industrial nation’s health.

To measure GDP, there are two main ways: the first is the nominal gross domestic product, and the second is the real gross domestic product. The person’s choice of one of them and the benefits of real and nominal Gross Domestic Product depend on how one uses the final indicator and if he or she wants to take inflation into account.

Nominal Gross Domestic Product is a measure that determines the value of all products and services at the current market price and produced in a country. Nominal GDP is also known as “chain dollar GDP” and “current dollar GDP”. When calculating a country’s GDP, it takes into account all the price changes, interest rates, inflation, and money supply.

Real gross domestic product is a measure of a country’s output in terms of the value of its goods and services, its investments, government spending, and exports.

Real GDP accepts nominal GDP and is adjusted for deflation and inflation by converting and comparing prices into base year prices. Given the changes in prices, the final number will not reflect a false increase or decrease in GDP due to price fluctuations, and it more accurately reflects the country’s economic activity.