What is the Difference Between Nominal and Real GDP?

The main difference between nominal and real GDP lies in the adjustments made for inflation. Here are the key differences between the two:

1. Nominal GDP: This measures the output of an economy using current prices. It reflects the raw numbers in current dollars, unadjusted for inflation. Nominal GDP is calculated using the following equation:
2. Real GDP: This measures the output of an economy using constant prices, which removes the effects of inflation or deflation. Real GDP provides a more accurate reflection of the output of an economy than nominal GDP. Real GDP can be calculated by dividing nominal GDP by the GDP deflator, which is a measurement of inflation since a base year.

In summary, nominal GDP measures the total value of goods and services produced within a country's borders using current prices, while real GDP measures the output using constant prices, thereby accounting for inflation or deflation. Real GDP is often preferred for analyzing long-term economic performance, as it provides a more accurate picture of the economy's growth or decline.

Comparative Table: Nominal vs Real GDP

The main difference between nominal and real GDP lies in the adjustment for inflation. Nominal GDP measures the value of all goods and services produced in an economy using the current market prices, while real GDP measures the value of goods and services produced using constant prices, which removes the effect of inflation. Here is a summary of the differences between nominal and real GDP:

In summary, real GDP is a better indicator of economic performance and growth, as it eliminates the distorting effect of inflation. Nominal GDP, on the other hand, is not adjusted for inflation and can be misleading in terms of economic growth.