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. Trading

    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. Insights

    Is GDP Really an Accurate Measure of Economic Growth?

    What does GDP tell us about real economic growth or well-being? It turns out that the answer is quite different than what you might expect.
  3. Insights

    How to Calculate the GDP of a Country

    We explain how to calculate the GDP of a country using two different approaches.
  4. Insights

    The GDP and its Importance

    GDP is an accurate indication of an economy's size. Few data points can match the GDP and its growth rate's conciseness.
  5. Insights

    Explaining The World With Macroeconomic Analysis

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

    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. Insights

    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.
  8. Insights

    Explaining The World Through Macroeconomic Analysis

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

    Something Gross In GDP

    GDP is used to gauge the strength of the economy, but what is it actually measuring?
Hot Definitions
  1. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  2. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  3. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  4. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  5. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  6. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
Trading Center