Real and Nominal GDP

Nominal GDP values final goods and services produced within an economy at the prices prevailing in the same period. Real GDP values that output at constant base-year prices, thereby separating changes in production from changes in the general price level.

How they are measured

The two measures cover the same domestic production but use different prices for valuation.

• Nominal GDP is calculated as current-period quantities multiplied by current prices.
• Real GDP is calculated as current-period quantities multiplied by constant prices associated with a chosen base year.
• In the base year, nominal and real GDP are ordinarily equal because the same prices are used.

What the difference reveals

Nominal GDP may rise because output increases, prices increase, or both. Real GDP removes the effect of price changes and is therefore the preferred measure for comparing the economy's volume of output and growth across time.

• If nominal GDP grows faster than real GDP, the difference primarily reflects an increase in the prices of domestically produced output.
• The GDP deflator is an implicit price index calculated as: Nominal GDP divided by Real GDP, multiplied by 100.
• Unlike a consumer price index, the GDP deflator relates to the prices of all final goods and services included in domestic GDP.

Use and limitations

Real GDP growth is more meaningful for assessing changes in aggregate production, while nominal GDP is relevant for monetary values such as the size of the economy at current prices. However, base-year revision is periodically required because production patterns and relative prices change.

• Real GDP does not by itself reveal income distribution, environmental costs, unpaid work, or broader well-being.
• Cross-country comparisons also require attention to exchange rates or purchasing power parity, not merely nominal or real domestic growth rates.