Real GDP vs. Nominal GDP Explained

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 that depicts the economic health of a country for a given period. It is helpful in estimating the growth rate of a country and their size of the economy. Hence, it acts as a tool that 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) 

Where, 

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 studied 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 the 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 by 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. 

The total value of all the final goods and services that are produced by an economy during a given year that accounts for inflation is known as real GDP. It is calculated using the prices of a selected base year. Real GDP, accounts for the fact that if prices change but the output doesn’t, nominal GDP would change. 

Nominal GDP vs Real GDP 

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

The value of all the final goods and services produced by an economy during a given year is known as nominal GDP is calculated by the current year's prices in which the output has been produced. The market value of goods and services produced in an economy and unadjusted for inflation is a Nominal GDP.

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 analyze 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. 

\[GDP deflator = \left ( \frac{Nominal GDP}{Real GDP} \right ) * 100 \]

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. 

• Unregistered or nominal GDP refers to the market value of all final goods that are produced in a geographical region.

• If the output does not change but price changes from one period to the next then the nominal GDP would change, irrespective of the change in output.

•  Real GDP accounts for changes in prices due to inflation.

• Real GDP is actually nominal GDP that is just adjusted for inflation.

• Real GDP would remain the same if prices change from one period to the next irrespective of the change in output.

• Change in real production is reflected by real GDP and nominal GDP will remain the same as real GDP if there is no inflation or deflation.

Equation

GDP is calculated by the formula:

GDP= C+G+I+NX

where

C=consumption;

G=government spending;

I=investment; and

NX=net exports

True False Questions to Answer 

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

Ans. True

Q2. Nominal GDP is always larger than real GDP. 

Ans. False

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

Ans. False 

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

Ans. True

Q5. Real GDP is inflation-adjusted GDP. 

Ans. True

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. 

Ans. True

Multiple Choice Questions 

1. 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 analyzing the current production scenario

4. None of the above 

Answer: c 

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

1. GDP increases in the short term 

2. Increased cost in the long term 

3. GDP increases in the long term 

4. Increased cost in the short term

Answer: a