Nominal Vs Real GDP – Complete Lesson

Key difference between nominal vs real GDP is, nominal GDP is calculated based on current prices while real GDP is calculated based on constant prices.

Nominal GDP means the current monetary value of the produced final goods and services within an economy. The real GDP means the value of the GDP using on the predetermined base market prices.

What is nominal GDP?

Nominal Gross Domestic Product ( NGDP) means the monetary value of the currently produced (produced within the current period, not in the previous periods), final goods and services (not including the intermediate goods and services) in a specific geographical area (usually within a country or a region). NGDP is calculated based on the current monetary values.

Nominal GDP is also known as a “current dollar GDP” or “chained dollar GDP.

How to calculate nominal GDP?

GDP includes the total value of an economy in dollars for private consumption, private investments, government expenditure, and net exports.

So, according to the aggregate expenditure approach, nominal GDP is the combination of four factors. They are private consumption, investment, government spending, and net expenditure. We can calculate the nominal GDP using the Nominal GDP formula.

Nominal GDP formula

NGDP (Nominal Gross Domestic Product) = Consumption (C) + Private Investment (I) + Government expenditure (G) + Net Exports (Nx)

Nominal GDP calculator

Other than nominal GDP formula, we can calculate the nominal GDP using a nominal GDP calculator. It is very easy. You have to type the values of components of the GDP and then the nominal GDP calculator calculates the Nominal GDP value.

What is real GDP?

Nominal Gross Domestic Product ( nominal GDP) means the monetary value of the currently produced (produced within the current period, not in the previous periods), final goods and services (not including the intermediate goods and services) in a specific geographical area (usually within a country or a region).

When nominal GDP is adjusted for the changes of the general price level (inflation or deflation), we call it “real GDP”. Since the real GDP is free from price level changes, it is highly acceptable to measure the economic health of a country. Real GDP is calculated based on a fixed unit of currency.

How to calculate real GDP?

To calculate the real GDP, we should calculate the GDP deflator first. The GDP deflator is a measurement of determining price levels of new goods that are available in a country’s domestic market. GDP deflator removes the changes of the price level. That means GDP deflator removes the impact of the inflation and deflation.

Real GDP formula

Real GDP calculator

Other than real GDP formula, we can calculate the real GDP using a real GDP calculator. It is very easy. You have to type the values of nominal GDP and GDP deflator then the Real GDP calculator calculates the Nominal GDP value.

Difference between nominal GDP and real GDP with example

Let’s understand the difference between nominal vs real GDP with an numerical Example

Assume that following data is regarding to the an economy for the year 2022.

Calculate nominal GDP and real GDP of that economy

Calculate Nominal GDP

Nominal GDP = C + I + G + Nx

Calculate Real GDP

Real GDP             = Nominal GDP /GDP deflator

Real GDP             = USD 20bn /1.02 = USD 19.6bn

Nominal vs real GDP

1. Nominal GDP means the current monetary value of the produced final goods and services within an economy. The real GDP means the value of the GDP using on the predetermined base market prices.

2. Usually, the value of the nominal GDP is higher than the real GDP. Because Nominal GDP is calculated based on the current market prices while real GDP is calculated using the base market prices. Current market prices are impacted by the inflation.

3. Real GDP is more popular than nominal GDP among economists because real GDP goes deep into the concept. Real GDP provides more accurate information about the healthiness of an economy while nominal GDP does not do that much.

4. We can easily analyze economic growth using real GDP statistics. Because real GDP is free from price changes. But it is difficult to calculate economic growth using nominal GDP. Because nominal GDP includes the price changes. So it is difficult to determine the economic growth.

Difference between real GDP and nominal GDP – Table

Let’s understand the difference between nominal vs real GDP in following table

Meaning

How does inflation affect it?

Based prices

Value of GDP

Complexity to calculate

Popularity among economists

Growth of the economy

Comparison with earlier GDPs

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