GDP is a key measure for assessing the economy’s activity, stability, and growth of goods and services. It is typically analyzed in two ways: real and nominal. The Compare Real GDP and Nominal GDP table below shows the main differences between these two types of GDP that economists, businesses, investors, and government officials consider.
| # | Real GDP | Nominal GDP |
| Based On | Base year market prices | Current market prices |
| Adjusted for Inflation | Yes | No |
| Value (During Inflation) | Lower | Higher |
| How Accurate | More accurate | May overstate growth during times of inflation |
| Other Names | Constant dollar or inflation-adjusted GDP | Current dollar GDP |
Economists rely on the BEA’s real GDP data for studying the economy and for planning by central banks. The table above shows that the key difference between nominal GDP and real GDP is that real GDP adjusts for inflation.
Nominal GDP is calculated with current prices, so it doesn’t need adjustments for inflation. This makes it easier to compare data from one quarter to another or from one year to the next. However, remember that these comparisons may not be very meaningful.
Real GDP is a more accurate way to assess a country’s long-term economic health compared to nominal GDP. By using a GDP price deflator, real GDP shows the value of goods and services based on their quantity. Without real GDP, it can be hard to tell if the economy is truly growing or if the increase in nominal GDP is just due to higher prices.
When nominal GDP is greater than real GDP, it means there is inflation. On the other hand, if real GDP is greater than nominal GDP, it indicates deflation.
Example of Real GDP and Nominal GDP
Real GDP is less than nominal GDP when inflation happens, and it is more during deflation. For example, imagine a country with a nominal GDP of $100 billion in 2000, which increased by 50% to $150 billion by 2020. However, inflation decreased the dollar’s purchasing power by 50% during that time.
When we only consider nominal GDP, the economy seems to be doing great. However, the real GDP, adjusted to 2000 dollars, shows a figure of $75 billion, which actually points to a decline in economic growth. Because of this accuracy, economists prefer using real GDP to assess economic performance.
Real GDP More Accurate Than Nominal GDP
Real GDP is seen as a better measure than nominal GDP because it takes inflation into account. This allows it to show the true state of the economy. In contrast, nominal GDP does not give a clear view of the economy’s condition or its future. This is because it uses current market prices in its calculations, making it only useful for comparing with other figures that also do not adjust for inflation.
Conclusion
Here is the end of Compare Real GDP and Nominal GDP artcle. If you want to know more about GDP, you can read What Is Gross Domestic Product (GDP)?