Nominal GDP vs Real GDP

Publication Date :

25 Feb, 2018

Blog Author :

Edited by :

Reviewed by :

Table Of Contents

Differences Between Nominal GDP and Real GDP

Nominal GDP measures the annual production of goods or services at the current price. On the other hand, Real GDP measures the yearly production of goods or services calculated at the actual cost without considering the effect of inflation. Hence, nominal gross domestic product is regarded as a more apt measure of GDP.

As a business owner or customer, you should know about a nominal and real gross domestic product if you are involved. These concepts are important as you would make important decisions about buying and selling based on these two.

In simple terms, GDP means the total finished products, goods, and services produced within a country during a particular period.

That means GDP is a price tag about an economy's total market value during a particular period.

Here's how we will break down GDP: -

GDP = C + G + I + NX

Here, "C" stands for consumers' spending during a particular period.
"G" stands for the government's spending.
"I" stands for businesses' capital spending.
"NX" stands for "net exports," which can be further described as "exports – imports."

Let us now talk about Nominal and Real GDP.

The nominal GDP is the GDP calculated at the current market price. So, that means nominal GDP expresses all recent changes in the market.
The real GDP is calculated by taking a base year as a determinant. For example, if we need to calculate the real GDP of 2016 and if we took 2010 as the base year, we would calculate the real GDP by taking all the quantities of goods, services, and finished products and then would multiply them by the prices of 2010.

Differences Between Nominal GDP and Real GDP

Nominal GDP vs Real GDP Infographics

Let us see the top differences between Nominal GDP and Real GDP.

Nominal GDP vs Real GDP Video Explanation

Key Differences

The nominal GDP takes the current market price to calculate the year's GDP. The real GDP takes the market price of the base year and the quantity produced for the current year and then finds out the year's GDP.
The nominal GDP is not popular among economists because it scratches the surface. On the other hand, the real GDP is very popular among economists because it goes deep into the concept.
The nominal GDP is much higher in value since the current market price is considered. Conversely, the real GDP is much lower in value since the base market price is considered.
Analyzing the economic growth through the nominal gross domestic product is not easier since it scratches the surface. On the other hand, analyzing economic growth through real GDP is significantly and comparatively easier.

Nominal vs Real GDP Comparative Table

Basis for Comparison	Nominal GDP	Real GDP
Meaning	The nominal GDP is the sum total of the economic output produced in a year valued at the current market price.	The real GDP is the sum-total economic output produced in a year's values at a predetermined base market price.
Based on	Current market price.	Base year’s market price.
How does inflation affect it?	The nominal GDP does not take inflation into account.	The real GDP takes inflation into account. It is called inflation-adjusted GDP.
Value of GDP	It is much higher since the current market changes are taken into effect.	It is much lower since the market price of the base year is taken into consideration.
Popularity	The nominal GDP is less popular.	The real GDP is more popular.
Complexity	The nominal GDP is very easy to calculate.	The real GDP is a bit complex to ascertain.
Comparison with earlier GDPs	One can compare the nominal GDP with the previous quarters.	One can compare the real GDP with the last financial years.
Growth of the economy	From the nominal GDP, we cannot analyze economic growth easily.	From the real GDP, we can explore economic growth easily.

Conclusion

Understanding both gross domestic products is very important. But, if you want to understand the reality of things, you need to know how real GDP is calculated in real life. Then, you can take many examples from real life and create your version of GDP.

Doing this will help you understand the value of the nominal GDP and real GDP. At the same time, you would perceive why the government, institutions, and businesses talk about GDP in all contexts.