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Difference between Nominal GDP and Real GDP

Essay Topic:

The Gross Domestic Product (GDP) of a country is the value in the market of all goods and services produced in a certain area or a certain country within a certain period of time (Investopedia. com). It is usually used to measure the size of the country’s economy.

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However, there are other aspects that should be considered in the measurement of the country’s GDP. This is where the Nominal and Real GDP comes in. The Nominal GDP is gross domestic product in that year’s prices (Investorwords.com).

For example, the GDP of 2006 is dependent on the value of the dollar in 2006. It is not affected by other factors like inflation rates and others that would tend to decrease the actual GDP. Nominal GDP on the other hand, may increase due to the increased output of an economy, or when the prices in that economy have also increased. However, Nominal GDP may not be that useful as a gauge of the country’s production, since it is not affected by the actuality of the current inflation rates.

Because of this, the Real GDP is a much preferred measure. The Real Gross Domestic Product on the other hand, is defined as the number that results from computing all the productive activity within the country depending on that certain year’s prices (FX Words). But when what is being valued is the economic activity of more than one period of time, and then the purchasing power will be computed and compared.

Because of this, the effects of the inflation at that year should be removed by maintaining constant prices. This usually lowers the computed GDP value instead of increasing it like the effect in Nominal GDP. It is the nominal GDP stated in the base-year level of price, wherein it is the nominal GDP of a certain year adjusted for inflation. The Real GDP is being expressed as a percentage.