Differences Between Nominal GDP and Real GDP
Nominal GDP is the measure of the annual production of goods or services at the current price whereas Real GDP is the measure of the annual production of goods or services calculated at actual price without considering the effect of Inflation and hence Nominal Gross Domestic Product is considered a more apt measure of GDP.
If you’re involved in the business – as a business owner or as a customer, you should know about a nominal and real gross domestic product. Both of these concepts are important because, on the bases of these two, you would make important decisions about buying and selling.
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.
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Here’s how we will break down GDP –
- Here, “C” stands for consumers’ spending during a particular period.
- “G” stands for the 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 and real GDP.
- Nominal gross domestic product 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.
Nominal GDP vs Real GDP Infographics
Let’s see the top differences between Nominal vs Real GDP.
- Nominal Gross Domestic Product takes the current market price to calculate 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 Gross Domestic Product 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 Gross Domestic Product 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 Gross Domestic Product isn’t easier since it just scratches the surface. Analyzing economic growth through Real GDP is significantly and comparatively easier.
Nominal vs Real GDP Comparative Table
|Basis for Comparison||Nominal GDP||Real GDP|
|Meaning||Nominal gross domestic product 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’s values at a pre-determined base market price.|
|Based on||Current Market Price.||Base Year’s Market Price.|
|How inflation affects it?||The nominal gross domestic product doesn’t take inflation into account.||Real GDP takes inflation into account; it’s called inflation-adjusted GDP.|
|Value of GDP||It 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.|
|Popularity||Nominal gross domestic product is less popular.||Real GDP is more popular.|
|Complexity||Nominal gross domestic product is very easy to be calculated.||Real GDP is a bit complex to ascertain.|
|Comparison with earlier GDPs||The nominal gross domestic product can be compared with the previous quarters.||The real gross domestic product can be compared with the previous financial years.|
|Growth of the economy||From the nominal GDP, economic growth can’t be analyzed easily.||From real gross domestic product, economic growth can be analyzed easily.|
Understanding both gross domestic product 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. 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 gross domestic product and real gross domestic product and at the same time, you would be able to perceive why the government, institution, businesses talk about GDP in all contexts.
Nominal GDP vs Real GDP Video
This has been a guide to Nominal GDP vs real GDP. Here we discuss some top differences between them along with infographics, and comparative tables. You may also have a look at the following articles to learn more –