Differences Between Nominal GDP vs Real GDP
If you’re involved in the business – as a business owner or as a customer, you should know about nominal and real GDP. Both of these concepts are important because on the bases of these two, you would make important decisions about buying and selling.
Before talking about nominal and real GDP, it’s important that you know about the gross domestic product (GDP) of a country.
In simple terms, GDP means the total finished products, goods, and services produced within a country during a particular period.
That means GDP is a price tag about an economy’s total market value during a particular period.
Here’s how we will break down GDP –
GDP = C + G + I + NX
- Here, “C” stands for consumers’ spending during a particular period.
- “G” stands for government’s spending.
- “I” stands for businesses’ capital spending.
- “NX” stands for “net exports” which can be further described as “exports – imports”.
Let’s now talk about nominal GDP and real GDP.
- Nominal GDP is the GDP which is calculated at the current market price. That means nominal GDP expressed all recent changes in the market.
- Real GDP, on the other hand, is calculated by taking a base year as a determinant. For example, if we need to calculate the real GDP of 2016 and if we would take 2010 as the base year; we would calculate the real GDP by taking all the quantities of goods, services, finished products and then would multiply with the prices of 2010.
In this article, we will look at both nominal GDP and real GDP and then we will do a comparative analysis between them.
Nominal GDP vs Real GDP Infographics
As you can see that nominal GDP vs real GDP aren’t similar, it’s natural to have many differences between them. Let’s have a look at them one by one –
Nominal GDP and Real GDP Differences
Key differences between nominal GDP vs real GDP are as follows –
- Nominal GDP is easy to compute. On the other hand, real GDP is very complex to ascertain.
- Nominal GDP takes the current market price to compute the GDP of the year. Real GDP takes the market price of the base year and the quantity produced for the current year and then finds out the GDP of the year.
- Nominal GDP is not so popular among economists because it just scratches the surface. Real GDP is very popular among economists because it goes deep into the concept.
- Nominal GDP is much higher in value since the current market price is taken into account. Real GDP is much lower in value since the base market price is taken into account.
- Analyzing the economic growth through nominal GDP isn’t easier since it just scratches the surface. Analyzing the economic growth through real GDP is significantly and comparatively easier.
Nominal GDP and Real GDP Comparitive Table
|Basis for Comparison of Nominal GDP vs Real GDP||Nominal GDP||Real GDP|
|1. Meaning||Nominal GDP is the sum-total of the economic output produced in a year valued at the current market price.||Real GDP is the sum-total of the economic output produced in a year values at a pre-determined base market price.|
|2. Based on||Current Market Price.||Base Year’s Market Price.|
|3. How inflation affects it?||Nominal GDP doesn’t take inflation into account.||Real GDP takes inflation into account; it’s called inflation-adjusted GDP.|
|4. The value of GDP||Is much higher since the current market changes are taken into effect.||Is much lower since the market price of the base year is taken into consideration.|
|5. Popularity||Nominal GDP is less popular.||Real GDP is more popular.|
|6. Complexity||Nominal GDP is very easy to be computed.||Real GDP is bit complex to ascertain.|
|7. Comparison with earlier GDPs||Nominal GDP can be compared with the previous quarters.||Real GDP can be compared with the previous financial years.|
|8. Growth of the economy||From nominal GDP, the economic growth can’t be analysed easily.||From real GDP, the economic growth can be analysed easily.|
Understanding nominal GDP and real GDP are both important. But, if you want to understand the reality of things, you need to know how real GDP is calculated in real life. You can take many examples from real life and create your version of GDP. Doing this will help you understand the value of nominal and real GDP and at the same time, you would be able to perceive why government, institution, businesses talk about GDP in all contexts.
This has a been a guide to the top differences between nominal GDP vs real GDP. Here we also discuss the differences between the two with examples, infographics, and comparison table. You may also have a look at the following articles to learn more –
- Best Macroeconomics Books
- What is Macroeconomics?
- Microeconomics vs Macroeconomics
- Microeconomics Complete Guide