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.

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