Difference between nominal GDP and real GDP

Introduction

Gross domestic product (GDP) is an economic indicator that measures the production of final goods and services within an economy in a given period. GDP can be measured in two ways: nominal and real.

What is nominal GDP?

Nominal GDP measures the value of all final goods and services produced in an economy in current monetary terms, that is, without adjusting for inflation. This type of GDP reflects the total value of goods and services produced within a country in a given period. However, nominal GDP does not necessarily reflect the purchasing power of goods produced due to inflation.

What is real GDP?

Real GDP, on the other hand, measures the value of goods and services produced in an economy but taking into account the effect of inflation. This measure of GDP takes into account the price index to adjust nominal values ​​to constant prices and reflect the purchasing capacity of the economy.

Differences between nominal GDP and real GDP

The main difference between nominal GDP and real GDP is that the former does not take into account the effect of inflation while the latter does. This means that nominal GDP can give a distorted view of the economic reality of a country.

Example:

Suppose that in one year, a country produces 100 units of a good and the price of each unit is $10. The nominal GDP of this country would be $1,000. Now, suppose that the following year, the country produces 110 units of the same good and the price of each unit increases to $12. The nominal GDP of this country would be $1,320. However, the increase in nominal GDP can be misleading as it does not take into account the change in prices due to inflation. In this example, nominal GDP increased by 32% but purchasing power actually decreased because the price of each unit increased from $10 to $12. To take this effect into account, real GDP is used.

Why is real GDP used?

The use of real GDP is important because it allows us to compare the production of goods and services from one period of time to another period, eliminating the effect of inflation. This is especially useful for analyzing the economic growth of a country in real terms, which reflect the productivity and purchasing power of citizens.

Conclusion

In short, nominal GDP is a measure of economic output that does not take into account the effect of inflation, while real GDP does. The use of real GDP is important to analyze economic growth and the purchasing power of citizens, since it allows us to compare production from one period to another, eliminating the effect of inflation.

• In short, Real GDP is a more accurate and realistic measure of economic growth.




• It is important to remember that nominal GDP can be misleading if the effect of inflation is not taken into account.




• It is recommended use both nominal GDP and real GDP to get a complete picture of a country's economic situation.