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Difference between Nominal GDP and Real GDP

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  • Last Updated : 13 Jun, 2022
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GDP or Gross Domestic Product is the total money value of all the goods and services manufactured within the geographical boundaries of a country during a period of one year. Gross in GDP means that depreciation is included in the monetary value of the goods and services. Domestic signifies that goods and services included in GDP are produced within the domestic boundaries of the country. However, product means that only final goods and services will be included. 

Nominal GDP or GDP at Current Price

Nominal GDP is the Gross Domestic Product of a country of a given year, estimated on the basis of the price of the goods and services of the same year. The formula for determining the Nominal GDP of a country is,

Nominal~GDP=\frac{Real~GDP\times{Price~Index}}{100}

Real GDP or GDP at Constant Price

Real GDP is the Gross Domestic Product of a country of a given year, estimated on the basis of the price of the goods and services of a base year. The formula for determining the Real GDP of a country is,

Real~GDP=\frac{Nominal~GDP}{Price~Index}\times{100}

The Real GDP of a country can be more, equal, and less than its Nominal GDP. 

Real GDP > Nominal GDP: When the price level of goods and services in the base year is more than the price level of goods and services in the current year. 

Real GDP = Nominal GDP: When the price level of goods and services in the base year is the same as the price level of goods and services in the current year.

Real GDP < Nominal GDP: When the price level of goods and services in the base year is less than the price level of goods and services in the current year. 

Difference between Nominal GDP and Real GDP

Basis 

Nominal GDP

Real GDP

MeaningNominal GDP is the monetary value of all goods and services produced within the domestic boundaries of a country based on the price of the goods and services of the same year. Real GDP is the monetary value of all goods and services produced within the domestic boundaries of a country based on the price of the goods and services of the base year.
What is it?Nominal GDP is the Gross Domestic Product without any effect of inflation.Real GDP is the inflation-adjusted GDP of a country. 
ExpressedThe Nominal GDP of a country is expressed in terms of current year prices of goods and services. The Real GDP of a country is expressed in terms of base year prices or constant prices of goods and services. 
ComplexityIt is easy to calculate Nominal GDP.It is quite difficult to calculate Real GDP. 
Value of GDPThe value of Nominal GDP is much higher than the value of Real GDP because it takes current market changes into consideration. The value of Real GDP is much lower than the value of Nominal GDP because it takes the market price of the base year into consideration. 
Comparison with the previous GDPsOne can compare the Nominal GDP of different quarters of a country.One can compare the Real GDP of different financial years of a country. 
Economic GrowthOne cannot easily analyze the economic growth of a country with its Nominal GDP. One can easily analyze the economic growth of a country using its Real GDP, as it is a good indicator of economic growth. 

Is Nominal GDP better or Real GDP?

Real GDP is better than Nominal GDP because of the following reasons:

1. Helps in the determination of the effect of increased production

Real GDP helps an economy to determine the effect of increased production levels of goods and services within a year. Real GDP is better for this determination because even though there is no change in the physical or actual production of goods and services, a change in their price affects the value of Nominal GDP. 

2. Better Periodic Comparison 

Real GDP is better than Nominal GDP for making a periodic comparison in the production of physical output of goods and services of a country over different years. 

3. Facilitates International Comparison

The Real GDP of an economy also facilitates a better international comparison of the economic performance across the countries. 

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