What is difference of nominal and real GDP?

Answer 1

Take in context the year of 2010, the prices of a certain product and the following 2 years are 2$, 3$, 4$

The real GDP is calculated by price of the base year(constant value) multiply to the quantity sold in that year:

-2010: 2$*Quantity(2010)

-2011: 2$*Quantity(2011)

-2012: 2$*Quantity(2012)

Nominal GDP uses the current price instead of the price of the base year:

-2010: 2$*Quantity(2010)

-2011: 3$*Quantity(2011)

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Answer 2

AnswerReal GDP takes into account the inflation rate and thus is more accurate at recording the actual increase in production activities. It is not affected by changes in prices, changes in real GDP reflect only changes in the amount being produced, so it is a more accurate measure of economic well being.

Answer 3

"Nominal" in this context means that it is simply a reflection of the amount of money, not the actual value of that money in terms of goods and services. However, the value of a currency changes from year-to-year, thanks to inflation and deflation. 1990 Dollars and 2010 dollars are no the same thing. If we convert them both to 2005 dollars, we can compare them on an even basis. Real GDP is inflation-adjusted, and thus provides a better gauge of how much actual wealth the nation is generating compared to other years.

Take a look at the hyperinflation in Weimar Germany after WWI, and you can see one extreme example of why we need to adjust for inflation. People who were making 20 marks a week were now being paid trillions of marks per day for their work, and they could not buy nearly as much with it. Comparing nominal GDP's between 191X Germnay and 192X Germany would suggest that Germany had suddenly become the richest country on Earth. Comparing Real GDP's would immediately show that they were in a deep depression.