Nominal vs. Real GDP



Next video:
Loading the player...

GDP stands for gross domestic product and is the measure of the total economic output of the goods and services of a country. GDP is usually expressed on an annual basis, but is sometimes expressed on a quarterly basis within a year.

Real GDP is equal to the economic output adjusted for the effects of inflation. Nominal GDP is economic output without the inflation adjustment.  

Nominal GDP is usually higher than real GDP because inflation is typically a positive number. Nominal GDP is used when comparing different quarters of output within the same year. When comparing the GDP of two or more years, real GDP is used because, by removing the effects of inflation, the comparison of the different years focuses solely on volume.  

The year-to-year comparison for real GDP requires what is called a base year. The base year is nothing more than the year to which all the other years are adjusted. Think of it as the “as if” year in that all the other years' GDP must be adjusted as if prices were the same in that year as they were in the base year. 

For example, Callowaynia is a small island country that only produces one product, golf balls. Callowaynia's nominal GDP was 70 million for 2012, and 90 million for 2013. $20 million seems like a substantial increase in GDP. But in 2012, the price of a golf ball was $1. In 2013, the price for a golf ball increased to $1.20. Callowaynia’s 2012 total output, in units, was 70 million golf balls ($70 million/$1). For 2013 the total output was 75 million golf balls ($90 million/$1.20). If the 2013 nominal GDP was adjusted for inflation so that the total units produced were calculated at the 2012 price of $1 (since 2012 is the base year in this example), then real GDP for 2013 is $75 million (75 million units X $1 per unit). With this adjustment, there is still an increase in GDP, but only $5 million, which is solely attributable to the increase in production from 70 million golf balls to 75 million golf balls.  

Related Articles
  1. Markets

    Calculating the GDP Price Deflator

    The GDP price deflator adjusts gross domestic product by removing the effect of rising prices. It shows how much an economy’s GDP is really growing.
  2. Markets

    How The GDP Of The US Is Calculated

    The US GDP may not be a perfect economic measure, but the ability to compare it to prior periods and other countries makes it the most applicable.
  3. Markets

    Explaining The World With Macroeconomic Analysis

    Macroeconomists try to forecast economic conditions to help consumers, firms and governments make better decisions.
  4. Markets

    How To Calculate The GDP Of A Country

    We explain how to calculate the GDP of a country using two different approaches.
  5. Markets

    Macroeconomics: Economic Performance and Growth

    By Stephen Simpson Income is one of the most significant factors in measuring economic performance, and gross domestic product (GDP) is the most commonly used measure of a country's economic ...
  6. Markets

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
  7. Markets

    How To Calculate The GDP Of A Country

    A nation’s gross domestic product measures the monetary value of all of the goods and services it produces.
  8. Markets

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  9. Markets

    The World's Top 10 Economies

    A look at the top 10 economies in the world.
  10. Markets

    How Is The GDP Of India Calculated?

    India is a front-runner among developing economies. Investopedia explains how India calculates its GDP, an indicator of economic health and performance.
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center