Skip to main content

Nominal vs Real GDP

 Nominal GDP

As we know GDP is the market value of the total output produced in the economy. So, if two goods are produced in the economy- good A and good B in the year 2023, and PA and PB be their respective prices for the year 2023. So, the total GDP produced in the country is 

Good A x Price of A + Good B x Price of B

Or in general terms, GDP = Q x P

The GDP calculated this way is also called Nominal GDP or GDP at current prices. Here, prices of the current accounting year are taken into consideration while computing the GDP. 

Nominal GDP can increase with an increase in quantity or prices or both. When the output of the nation remains same but the price level increases, the nominal GDP increases. However, this increase in GDP doesn't show an increase in the flow of goods and services in the nation i.e this type of GDP increase is not accompanied by an increase in production in the nation, but only an increase in prices. 

Real GDP 

Real GDP  measures the value of goods and services produced in the country without being effected by changes in prices. How can we see how much of a nations GDP has increased by an increase in the flow of goods and services and not prices. For this we calculate GDP or the value of goods and services produced at constant level of prices. When we measure the GDP at a constant set of prices, it is known as Real GDP. Therefore, Real GDP is an indicator of an increase in the nation's output only and not prices. 

Now what is this constant level of prices and how is it calculated?

To find the real GDP we basically choose a base year and the prices prevailing in the base year are called base-year-prices. 

So, real GDP is calculated as 

GDP = Q x P*

where Q is the quantity of goods and services produced during the year

and P* are the constant prices or prices prevailing during the base year. 

Therefore, the real GDP will increase only when there is an increase in the goods and services produced in the nation. 


Popular Posts

Understanding Trade-Offs in Economics: Balancing Choices for Optimal Outcomes

  TRADE-OFFS  Economics is concerned with people making decisions. However, these decisions are not always easy to make as making a decision involves making a choice. This choice may be between different alternatives/goals/options. Generally, choosing one goal means not being able to choose the other one. This results in what we call a trade-off where in order to choose one thing we have to let go or sacrifice the other one. Examples of Trade-Offs:  P eople face numerous trade-offs in their daily lives. Let’s say a person wants to reach his office. He may either go by car or bicycle. Going by a bicycle is not only environmentally friendly but also is a good exercise. However, going by a car will save time and make him reach faster. This is a situation of trade-off where the person has to choose an option and in choosing one, he will be giving up the other one. A family which has a limited monthly budget has to decide whether to spend that money on a vacation, saving for their chil
Read more

Measures of Central Tendency

Let’s say I walk into a class of fifth graders, and start asking them their ages one by one and note them down. There are 20 students in the class and this is what my list looks like Roll. No.               Age 1.                           10 2.                           10 3.                           10 4.                            9 5.                           10 6.                            10 7.                            9 8.                            11 9.                            10 10.                          10 11.                          12 12.                          10 13.                           9 14.                          10 15.                          10 16.                          11 17.                          10 18.                           10 19.                            9 20.                           10 As I look at their ages, do I see something common or worth noting. More specifically do I find a n
Read more

Consumer's Equilibrium using Marginal Utility Analysis

The Law of Diminishing Marginal Utility It has been observed that the desire to consume a commodity decreases as more and more units of that commodity are consumed. Therefore, every successive unit of the commodity consumed provides lesser utility than before. The Law of Diminishing Marginal Utility states that as more and more units of a commodity are consumed, the Marginal Utility derived from every successive unit of the commodity declines.  This happens because psychologically, as a consumer starts to consume one unit of the good after another, the the consumers satisfaction reaches a saturation point. So, with every successive unit consumed, the additional utility the consumer derives goes on declining.  Consumer's Equilibrium using Marginal Utility: Cardinal Analysis Consumer's equilibrium is that level of consumption at which the consumer is getting maximum satisfaction (benefit) while spending out of his given income across different goods and services, and has no tende
Read more