The main difference between Nominal GDP and Real GDP is that Nominal GDP calculates the value of domestic production prices of a year (normally the current year) and Real GDP calculates the total value of domestic production from the prices of a base year.
|Basis of Distinction||Nominal GDP||Real GDP|
|Definition||Normal DP is the total value of per year production of goods and services within the boundary of a country.||Real GDP is the total value of per year production of goods and services after adjusting the price changes like inflation or deflation|
|Adjustment of Inflation||It doesn’t include the impact of inflation||It is calculated after adjusting the inflation or deflation|
|Calculation Method||Prices of the current year are used for calculation||It is calculated from the prices of a base year|
|Scope||Use to make the price comparison of two different periods of the same years||Use to make a comparison of two financial years|
|Economic Growth||Hard to analyze||Generally acceptable indicator for economic growth|
What is the Nominal GDP?
Nominal GDP is the value of GDP evaluated at current prices in a specific period; this includes the impact of inflation and is normally higher than the GDP. In simple term, it is a GDP value that is calculated before the adjustment of inflation.
Nominal GDP that is also called as Raw GDP calculate the overall value of goods and services and other economic output produced by a country in a particular period normally a year. It is one of the important terms in two GDP methods that are used to calculate the GDP of a country. For example in the year 2005, the nominal GDP of the USA was $200 billion.
However, due to increasing the prices from the base year 2001 to 2005, the GDP is $180 billion. Here the lower Real GDP reflects the price changes while price change has no effect on Nominal GDP.
What is Real GDP?
Real GDP is an inflation-adjusted value of GDP. It expresses the value of goods and services produced in a country at base-year prices. Since it is an inflation-corrected figure, so it is deemed to be an accurate indicator of economic growth. It is calculated by taking into consideration the impact of inflation or deflation while calculating the overall monetary value of product and services produced in a country for a particular financial year normally the previous one.
It is considered to the more reliable GDP calculation technique because of being free from free fluctuations and exclusively considering the production only. For example, the GDP of the USA in a year is $100. Next year it rises to $105 along with an increase in an inflation rate of 3%. Here we can say that Real GDP rises to $102 only because of inflation that must be accounted for.
The key differences between Nominal GDP and Real GDP are given below:
- Nominal GDP is GDP calculated in current currency or the current prices that a consumer pays for final goods or services. Real GDP is the total value of goods and services of the country adjusted for prices changes.
- In Nominal GDP, the current financial year is used to calculate the value of goods and services while in Real GDP, the base year or previous years are used for calculating the monetary value of economic output.
- Nominal GDP is a GDP in current price while Real GDP is a product value in constant prices.
- As compare to Nominal GDP, Real GDP reflects the real change in output. It is more reliable for considering the impact of inflation and deflation.
- The value of Nominal GDP is micro in nature while the value of Real GDP is macro in nature.
- Nominal GDP is the best technique to make the comparison of the price value of two products in the same year. Real GDP is the best technique for making the comparison of figures of two different financial years.
- The value of Nominal GDP usually remains high than Real GDP because of not adjusting the figure of inflation that Real GDP always takes into consideration.
- The economic formula of Nominal GDP is Nominal GDP = Real GDP x GDP Deflator, while it is Real GDP, = Nominal GDP / GDP Deflator in the case of Real GDP.