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What Is a Nominal GDP?

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  • Written By: James Doehring
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  • Last Modified Date: 07 October 2014
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A nominal gross domestic product (GDP) is a measure of the total production in a country. The word nominal refers to the units the production is measured in, namely the current currency of the country in question. By contrast, a real GDP is fundamentally measured in units of common goods instead of money—in other words, a real GDP is adjusted for inflation. Nominal GDP is typically calculated in one of three ways: the production, expenditure, or income method. A GDP figure given in nominal terms can be convenient for measuring current economic activity that uses a familiar currency.

The first way to calculate nominal GDP is the production method, which is often considered the most direct. All goods and services in a country are tallied up to give the nominal GDP figure. The second method is the expenditure method, which sums up the spending of all citizens on domestic goods and services. Lastly, the income method works by totaling everyone’s received income in a country. Though the three methods give similar figures, some complications can result from international business transactions.

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Once a figure for nominal GDP is obtained, it can be left in nominal form or converted to real GDP. Real GDP is helpful in comparing economic output between two different times in history. Since inflation alters the inherent value of a given amount of money, different nominal GDP figures can describe the same level of output at different times. For example, the nominal GDP of the United States was about $521 billion US Dollars (USD) in 1960 and about $1.03 trillion USD in 1970. This does not mean that total output nearly doubled in 10 years; rather, output increased slightly and inflation accounted for the rest.

If real GDP currency figures are desired, they must be given in terms of a base year. Often, real GDP will be given in terms of a year’s currency, such as “1981 US Dollars.” This way, the figures can be used to meaningfully describe economic conditions of past eras with an intuitive currency reference. Few people are aware of how much a given unit of currency was worth several decades in the past. With real GDP figures, past economic phenomena can be described in terms of familiar currency.

Per capita GDP is a GDP figure divided by the total population of the country in question. It can be a useful, though not perfect, measure of average standards of living in a country. GDP in large part rises due to population expansion, but per capita GDP can indicate average productivity changes per worker.

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ysmina
Post 3

@simrin-- @turkay1 is right, but nominal GDP doesn't always have to be higher than real GDP. If there is deflation in the country (decrease in prices) instead of inflation (increase in prices), nominal GDP might come out less than real GDP for that year. Either way, it doesn't help when comparing between different years where there are price differences.

But you can still make a comparison with nominal GDP if you use the GDP deflator. This is a very simple formula that allows you to compare the price of one good in two separate years. All you need to do is divide nominal GDP by real GDP and then multiply by a hundred. It will give you the ratio of the current price to its base year price.

candyquilt
Post 2

@simrin-- I'm no economy expert, but I'll try to explain.

The example the article gave is actually a good one. It's basically saying that nominal GDP keeps changing because prices change. So when you calculate nominal GDP for two years back to back, you will see a significant increase in the second year. But it's not necessarily because GDP increased. It's because the prices increased. Nominal GDP doesn't allow you to make an accurate comparison for that reason.

What real GDP does is it chooses a base year. Whenever GDP is being calculated for a year, it uses the prices from that base year so that the comparison will be accurate. That's why it gives a more correct picture about how GDP has changed from one year to the next. Nominal GDP measures both price and production. Real GDP only accounts for production, not prices. That's why it's "real" GDP.

SteamLouis
Post 1

My instructor gave me homework where I'm supposed to explain why real GDP is better for making comparisons from one year to another.

I've read this article and all about real GDP but I still can't understand. To me, it sounds like they are basically the same except that real GDP has inflation and nominal GDP doesn't. But don't they both work well when making comparisons?

Can someone please explain in more detail what the difference is between nominal and real GDP? And why doesn't nominal GDP work well with comparisons?

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