Nominal GDP vs Real GDP

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Differences Between Nominal GDP and Real GDP

Nominal GDP measures the annual production of goods or services at the current price. On the other hand, Real GDP measures the yearly production of goods or services calculated at the actual cost without considering the effect of inflation. Hence, nominal gross domestic product is regarded as a more apt measure of GDP.

As a business owner or customer, you should know about a nominal and real gross domestic product if you are involved. These concepts are important as you would make important decisions about buying and selling based on these two.

Nominal-GDP-vs-Real-GDP

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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 valueMarket ValueMarket Value (MV) is the projected value for which an asset, or liability, would exchange between a willing buyer and seller in an independent transaction, following proper marketing, and where both parties acted with knowledge, caution, and without compulsion.read more during a particular period.

Here’s how we will break down GDP: –

GDP = C + G + I + NX

Let us now talk about Nominal and Real GDP.

Nominal GDP vs Real GDP Infographics

Let us see the top differences between Nominal GDP and Real GDP.

Nominal-GDP-vs-Real-GDP-info

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Nominal GDP vs Real GDP Video Explanation

Key Differences

  • The nominal GDP takes the current market price to calculate the year’s GDP. The real GDP takes the market price of the base year and the quantity produced for the current year and then finds out the year’s GDP.
  • The nominal GDP is not popular among economists because it scratches the surface. On the other hand, the real GDP is very popular among economists because it goes deep into the concept.
  • The nominal GDP is much higher in value since the current market price is considered. Conversely, the real GDP is much lower in value since the base market price is considered.
  • Analyzing the economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more through the nominal gross domestic product is not easier since it scratches the surface. On the other hand, analyzing economic growth through real GDP is significantly and comparatively easier.

Nominal vs Real GDP Comparative Table

Basis for ComparisonNominal GDPReal GDP
MeaningThe nominal GDP is the sum total of the economic output produced in a year valued at the current market price.The real GDP is the sum-total economic output produced in a year’s values at a predetermined base market price.
Based on Current market price.Base year’s market price.
How does inflation affect it?The nominal GDP does not take inflation into account.The real GDP takes inflation into account. It is called inflation-adjusted GDP.
Value of GDPIt is much higher since the current market changes are taken into effect.It is much lower since the market price of the base year is taken into consideration.
PopularityThe nominal GDP is less popular.The real GDP is more popular.
ComplexityThe nominal GDP is very easy to calculate.The real GDP is a bit complex to ascertain.
Comparison with earlier GDPsOne can compare the nominal GDP with the previous quarters.One can compare the real GDP with the last financial years.
Growth of the economyFrom the nominal GDP, we cannot analyze economic growth easily.From the real GDP,  we can explore economic growth easily.

Conclusion

Understanding both gross domestic products is very important. But, if you want to understand the reality of things, you need to know how real GDP is calculated in real life. Then, you can take many examples from real life and create your version of GDP.

Doing this will help you understand the value of the nominal GDP and real GDP. At the same time, you would perceive why the government, institutions, and businesses talk about GDP in all contexts.

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This article is a guide to Nominal GDP vs Real GDP. We discuss the top 8 differences between nominal and real GDP with infographics and a comparative table. You may also have a look at the following articles to learn more: –