Real GDP and Nominal GDP

Before delving deep into the concepts of nominal and real GDP, it is necessary that students need to be well aware of GDP and all associated features along with it. Gross Domestic Product abbreviated as GDP is the measure of the economic or market value of all goods and services produced in a country for a definite period. The period is usually annual, but at times, GDP may be calculated quarterly. 

GDP meaning is that it is a comprehensive parameter which depicts the economic health of a country for a given period. It is helpful in estimation of the growth rate of a country and their size of the economy. Hence, it acts as a tool which guides businesses in various decision-making procedures. 

GDP of a country for a specific period is calculated using the following equation 

Gross Domestic Product = C + I + G + (X – M) 


C = Private consumption 

I = Gross investment 

G = Sum of government investment and government spending 

X = Exports 

M = Imports 

Further, the calculation of GDP can be done in three ways, using production, expenditures, or income. The concept can be further studies by reading about nominal and real GDP. 

What is Nominal GDP?

Nominal Gross Domestic Product or nominal GDP is the Value of GDP calculated as per the current market prices. So, nominal meaning it will contain all the changes in market prices owing to inflation and depletion for the current year. So, it represents the current market value of goods and commodities produced in a specific time. 

What is Real GDP?

Unlike nominal GDP of India, real GDP is an inflation-adjusted calculation of GDP. It is the estimate of the total value of all goods and commodities produced in a year which are accounted for inflation.

To calculate this, one needs to consider the prices of a selected base year. One needs to first calculate the change in GDP because of inflation and divide out the inflation for every year. Therefore, it is concluded that even if the change in prices doesn't lead to a change in output, then the nominal GDP would show change. 

Nominal GDP vs Real GDP 

Nominal GDP is also known as unadjusted GDP and is the measure of value of all end-products manufactured in a nation in a specific period. Here, the market value changes depending upon the change in quantity of production and change in respective prices of those goods and commodities. 

Real Gross Domestic Product or real GDP explains the change in price because of inflation. Therefore, it can be concluded that the inflation adjusted nominal GDP and real GDP are the same. Therefore, in a given financial year, if the price of production changes with the change in period, while the output remains unchanged, then the value of real GDP will remain the same. 

In an ideal scenario wherein there won't be any inflation/ deflation in a given period, the value of nominal GDP and real GDP will remain the same. Besides, it is easier to analyse or measure the real GDP than that of nominal GDP. 

Further, this price inflation observed in an economy can be determined by a term known as GDP deflator. Here's how it can be calculated. 

GDP deflator = (Nominal GDP / Real GDP) * 100 

It acts as a price index for customers and measures inflation or deflation in price in a given year. The study of such economic concepts is crucial for students as they give them in-depth ideas about the economical concepts relating to growth and development in the country. To learn more about the concepts, students can browse through Vedantu's website and check the vast quantities of study materials present. 

True False Questions to Answer 

Q1. Real GDP per capita is always smaller than real GDP. 

Q2. Nominal GDP is always larger than real GDP. 

Q3. Increase in nominal GDP of a country reflects that the country is producing more goods and services. 

Q4. Consumption, net exports, investment are all components of domestic products. 

Q5. Real GDP is inflation adjusted GDP. 

Q6. Real GDP or Real Gross Domestic Product is the measure of or the total value of productions made in a specific period in a country. 

Multiple Choice Questions 

Q1. What Does GDP Deflator Do?

  1. Based on the existing production, it displays real GDP growth. 

  2. It is in real terms 

  3. It is used to calculate inflation by analysing current production scenario

  4. None of the above 

Answer: c 

Q2. Increased aggregate demand for goods and commodities can lead to a situation whereby 

  1. GDP increases in short term 

  2. Increased cost in long term 

  3. GDP increases in long term 

  4. Increased cost in short term

Answer: a 

Q3. GDP is the Measure of:

  1. A country's income

  2. A country's wealth

  3. Net trade income

  4. Consumer spending

Q4. The Standard of Living is Often Measured by:

  1. Real GDP per capita

  2. Real GDP

  3. Real GDP * population

  4. Real GDP including depreciation

FAQ (Frequently Asked Questions)

1. What is Gross Domestic Product?

Ans - Abbreviated as GDP, Gross Domestic Product is the evaluation of a country's economy based on the market value of the Goods and services sold in a particular quarter of a financial year. The total value of produced goods and commodities forms the value of GDP and is an essential tool for businesses in several determinations. 

2. What is Nominal?

Ans - Nominal GDP is the value of end products which are unadjusted as inflation or deflation isn't included in it. It changes in case there is a change in the quantity of production or in case there is a change in the price of concerning goods and commodities.  

3. What is Real GDP and Nominal GDP?

Ans - Real and nominal GDP are both tools which help economists determine the economic condition of a country. Nominal GDP is inflation-free Gross Domestic Product whereas real GDP is inflation adjusted product. While nominal GDP deals with the current year prices and costs, real GDP is concerned with the regular prices or beginning year costs and prices.