Nominal GDP vs. Real GDP

Nominal GDP vs. Real GDP

Both Nominal and real GDP tells us about the annual total value of all final goods and services produced in a given country. GDP is the abbreviation of Gross Domestic Product.

The value of nominal GDP is not corrected by the level of inflation (the increase of prices). It means that the prices of goods and services which compose the value of GDP are "taken straight from the market", without taking into consideration the value of inflation. In case of high inflation level, the value of nominal GDP is also higher.

In opposite to nominal GDP, the real GDP is adjusted to the level of inflation. It means that the prices of goods and services which compose the value of GDP are "real prices" because they are corrected by the level of inflation. In the case of real GDP the level of inflation does not influence its value.

So, in summary:

If the increase of nominal GDP from year one to year two equals 10% and the inflation rate in the same period is 3%, than the real GDP increased only by 7%.

As we can see from the above example, in the presence of inflation, the value of nominal GDP is always higher than the value of real GDP. The real GDP would be lower than the nominal GDP only if the country experiences deflation (decrease of the general level of prices), but this situation almost never happens.

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