REAL GDP VS NOMINAL GDP

Nominal (or money) GDP is GDP evaluated at the price of the year being measured. It is also called GDP measured at the current price or GDP not adjusted for inflation.

Nominal GDP may, however, give a false impression of how well an economy is performing. This is because the market value of goods and services may increase not because more goods and services are being but because the price has increased.

For example, In a year where 1 billion goods and services were produced at an average price of €8 each, GDP will be €8 billion. If, in the next year, the same output was produced at an average price of €11, then, the nominal GDP will increase to €11 billion even though output didn't increase.

So, to avoid misdiagnosing output increases (or decreases), economists used the term "real GDP".

Real GDP is GDP evaluated at constant prices. This means it has been adjusted for the effect of inflation and deflation. It is also called GDP adjusted for inflation or GDP measured at constant prices

To derive real GDP from nominal GDP, We simply divide nominal GDP by GDP deflator and then multiply the result by 100. This means real GDP is nominal GDP divided by GDP deflator times 100

$R.GDP=\frac{N.GDP}{G.D}\times100$

N.GDPis nominal GDP

G.D is GDP deflator

If for example the Nominal GDP is €20 trillion and the GDP deflator is 110, real GDP is $R.GDP=\frac{20}{110}\times 100$

$R.GDP=18.18$

Real GDP is €18.18 trillion

Economic Growth: Real GDP Or Nominal GDP

Nominal GDP, by definition, is GDP not adjusted for inflation. So, this makes it unsuitable for measuring economic growth.

Economists want to be sure that the economy is growing.

Economic growth can be defined as the increase in the inflation-adjusted market value of goods and services over time.

Because Real GDP is gross domestic product adjusted for inflation, national income accountants usually use it for measuring economic growth.

Indeed, economic growth is measured as the percentage increase in real GDP for a particular period. You can only tell if an economy is in expanding or contracting using real GDP.

That is not to said that nominal GDP is not useful. Nominal GDP is useful for comparing changes in GDP from one quarter to another and that is the reason most quarterly GDP people are usually based on nominal GDP.

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1 comment

1. Thanks for the information