Loading the player...

What is 'Nominal Gross Domestic Product'

Nominal gross domestic product is gross domestic product (GDP) evaluated at current market prices. GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Nominal differs from real GDP in that it includes changes in prices due to inflation or a rise in the overall price level. Typically, economists use a gross domestic deflator to convert nominal GDP to real GDP. Also known as "current dollar GDP" or "chained dollar GDP." 

BREAKING DOWN 'Nominal Gross Domestic Product'

Nominal GDP can be measured by one of three ways: the expenditure, production or income approach. The expenditure approach adds up the market value of all domestic purchases of final goods and services in a single year. In the production approach, net production is determined by subtracting intermediate consumption from total estimated output. The income approach is the sum of all the income earned by firms and households in a single year, being all the income received in the form of wages, profit, interest and rent.

Effects of Inflation on Nominal GDP

A growing nominal GDP might reflect a rise in inflation as opposed to growth in the amount of goods and services produced.

Inflation is a negative force for economic participants because it diminishes the purchasing power of income and savings, both for consumers and investors.

When the overall price level of the economy rises, consumers have to spend more in order to purchase the same amount of goods. If an individual’s income rises by 10%, in a given time period, but inflation rises 10% as well, then that individual’s real income (purchasing power) is unchanged. Investors are averse to inflation because it eats into their return on investment. If they loan out $100 at a 7% interest rate for a given time period and inflation is 7% over that same period, their real rate of interest is zero.

Adjusting Nominal GDP

To extract real economic data from nominal GDP, without the distortion of inflation, an appropriate price index is needed. The most common prices indices are the Consumer Price Index (CPI), the Producer Price Index (PPI) and the GDP deflator.

CPI is a measure of the change in prices paid by urban residents for a market basket of consumer goods and services. This basket is broken up into the categories of food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and others goods and services, but it does not include any investment goods. The basket is measured in index points, so the rate of inflation can be calculated by dividing the change in index points by the CPI of the year you wish to measure inflation from. This value, in turn, is used to calculate real GDP growth from one year to another.

RELATED TERMS
  1. GDP Price Deflator

    The GDP price deflator is a system that converts output measured ...
  2. Nominal

    Nominal refers to an unadjusted rate, value or change in value. ...
  3. Nominal Value

    Nominal value is the stated value of an issued security, and ...
  4. Aggregate Hours

    Aggregate hours refer to the total sum of hours worked by all ...
  5. Nominal Rate Of Return

    The nominal rate of return is the amount of money generated by ...
  6. Real Value

    Real value is nominal value adjusted for inflation.
Related Articles
  1. Insights

    Nominal vs. Real GDP

    GDP stands for gross domestic product and is the measure of the total economic output of the goods and services of a country.
  2. Insights

    5 Government Statistics You Can't Trust

    Government economic statistics carry a lot of weight, but there are some significant gaps in the methodology.
  3. Insights

    Healthiest And Safest European Economies

    Economic indicators are to economists what symptoms are to doctors: signs of the relative well-being of the patient.
  4. Insights

    Why The Consumer Price Index Is Controversial

    Find out why economists are torn about how to calculate inflation.
  5. Investing

    Why GDP Can Grow at 3%: The Skeptics Are Wrong

    Hard data including booming earnings show the economy will pick up steam
  6. Insights

    One Reason Jobs Shrink: Superstar Companies

    Are superstar companies that dominate their industries but employ relatively few workers to blame for labor’s falling share of GDP?
  7. Insights

    U.S. Second Quarter GDP Disappoints

    The first reading of U.S. second-quarter GDP showed the economy grew at 1.2%, much slower than expected.
RELATED FAQS
  1. When do economists use real GDP instead of GDP?

    Learn about the purposes for which economists rely on real GDP. Find out how real GDP is calculated and how it is important ... Read Answer >>
  2. How does the stock market affect gross domestic product (GDP)?

    Find out how the stock market affects gross domestic product (GDP) through two different channels: financial conditions and ... Read Answer >>
  3. How do you calculate GDP with the Income Approach?

    There are generally two ways to calculate GDP: the expenditures approach and the income approach. Find out the factors that ... Read Answer >>
  4. How can I use the rule of 70 to estimate a country's GDP growth?

    Find out about the rule of 70, what it is used for and how to use it to determine the number of years a country's GDP takes ... Read Answer >>
  5. What is the Difference Between Real and Nominal Interest Rates?

    Learn about nominal interest rates and real interest rates and the difference between the two (hint: one of them takes into ... Read Answer >>
  6. What is the difference between asset-price inflation and economic growth?

    Read about the difference between asset-price inflation and real economic growth, and why a rising stock market or housing ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center