Gross Domestic Product or GDP refers to the economic value of goods and services produced within the nation’s boundaries, in a particular financial year plus income earned by foreign residents locally less income earned abroad by country’s residents. When the GDP is estimated at current prices, it exhibits Nominal GDP, whereas Real GDP is when the estimation is made at constant prices.
Both Nominal and real GDP are considered as a financial metric for evaluating country’s economic growth and development. However, the confusion still exists that which one better indicates the country’s progress than the other. Take a read of this article to know the differences between nominal and real GDP and it may also help you to overcome your confusion.
Content: Nominal GDP Vs Real GDP
|Basis for Comparison||Nominal GDP||Real GDP|
|Meaning||The aggregate market value of the economic output produced in a year within the boundaries of the country is known as Nominal GDP.||Real GDP refers to the value of economic output produced in a given period, adjusted according to the changes in the general price level.|
|What is it?||GDP without the effect of inflation.||Inflation adjusted GDP|
|Expressed in||Current year prices||Base year prices or constant prices.|
|Uses||Comparison of various quarters of the given year can be made.||Comparison of two or more financial year can be done easily.|
|Economic Growth||Cannot be analyzed easily.||Good indicator of economic growth.|
Definition of Nominal GDP
Nominal Gross Domestic Product is defined as a GDP measure, expressed in absolute terms. The raw GDP data, before inflation is called Nominal GDP. It is the aggregate monetary value of the economic output produced during a particular financial year, within the nation’s border. It represents the GDP at prevailing prices in the market, i.e. the current market price.
Definition of Real GDP
Real Gross Domestic Product refers to the measure of GDP adjusted according to the general price level, in a particular financial year. It represents the economic worth of goods and services produced, after considering inflation or deflation.
While calculating real GDP measurement is done at fixed prices, i.e. at the prices which are prevalent at some point of time in the past, known as base year price or reference price. It reflects the economic output at constant prices. Real GDP is considered as a true indicator of country’s economic growth because it exclusively considers the production and free from price changes or currency fluctuations.
Key Differences Between Nominal and Real GDP
The basic differences between Nominal and Real GDP are discussed as under:
- Nominal Gross Domestic Product refers to the monetary value of all goods and services produced during the year, within the geographical limits of the country. The economic worth of all goods and services produced in a given year, adjusted as per changes in the general price level is known as Real Gross Domestic Product.
- Nominal GDP is the GDP without the effects of inflation or deflation whereas you can arrive at Real GDP, only after giving effects of inflation or deflation.
- Nominal GDP reflects current GDP at current prices. Conversely, Real GDP reflects current GDP at past (base) year prices.
- The value of nominal GDP is greater than the value of real GDP because while calculating it, the figure of inflation is deducted from the total GDP.
- With the help of Nominal GDP, you can make comparisons between different quarters of the same financial year. Unlike Real GDP, in which comparison of various financial years can be made easily because by removing the figure of inflation, the comparison is made only between the outputs produced.
- Real GDP shows the actual picture of the economic growth of the country, which is not with the case of Nominal GDP.
These two exhibits the country’s financial soundness, whereby Real GDP is given preference over Nominal GDP, it makes the comparison easy for between different financial years. On the other end, Nominal GDP provides a better perspective for comparing different economies at current price level.