What is the difference between current dollars and constant dollars?

Answer 1

While the Current Dollar or Nominal GDP does not account for changes in the rate of inflation from one period to another, knowing the figure can still be helpful in a couple of ways. First, the Current Dollar calculation represents the market value of goods and services that are produced in the economic period under consideration. In other words, the figure represents the reality of the worth of the goods at the time they were produced. Knowing this figure is helpful in understanding exactly what was happening within a given economy at that point in time. Often, this information can help explain economic trends that emerged in later periods and why they took place.

Another benefit of knowing Current Dollar GDP is that it forms the basis for comparing the actual or real amount of growth that took place between two different economic periods. By dividing Current Dollar GDP by what is known as the GDP deflator, it is possible to allow for changes in the rate of inflation between two different years. Doing so allows comparisons of the Gross Domestic Product of two different periods in terms that truly demonstrate the relative value of goods and services between the two periods. It also helps show whether there was truly any growth in the economy.

For example, assume the most recently completed economic period is identified as Year A, while the previous economic period is known as Year B. If the nominal, or Current Dollar, GDP for Year A is $100B in United States dollars and the GDP deflator is 5%, this makes the Real GDP for Year A $95.24B USD. If the Current GDP for Year B came to $92B USD, then true economic growth occurred. However, if Year B had a nominal, or Current, GDP of $96B USD, this formula will reveal that the economy declined, even though there was an increase in Current Dollar GDP from Year B to Year A.