A:

Real GDP is designed to capture the total value produced in an economy in a given period, with the effect of inflation excluded. As such, real GDP captures changes in total quantities produced, but not changes in price. Nominal GDP, usually referred to only as GDP, measures the total value produced in an economy at current prices, tracking changes in prices and changes in output. As a result, real GDP accurately captures growth in the quantity of output, which nominal GDP cannot do.

Real and nominal GDP are constructed the same way. They can be calculated by summing up either the total incomes, the total spending or the total value of output produced over a given period. Theoretically, these approaches yield the same result, but since real data is often flawed, there are discrepancies in actual results. The only difference between the approaches is that nominal GDP calculations for a given year always use prices and quantities from that year, but real GDP calculations use prices from an arbitrarily chosen year (the base year) to compare the change in quantities produced. The calculations only use current-year prices if the base year is the current year.

Real GDP is a very valuable indicator, as it gives an accurate measure of an economy’s growth. If nominal GDP rises, it is not clear whether an increase in prices or an increase in output is the cause, but real GDP rises only when output rises. As such, real GDP is widely used by policymakers, investors and economists as a gauge of economic performance.

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