Sage-Tips

What is the difference between nominal and real GDP and why is real GDP the superior measure for evaluating growth over time?

Real gross domestic product (GDP) is a more accurate reflection of the output of an economy than nominal GDP. Nominal GDP reflects the raw numbers in current dollars. Real GDP adjusts the numbers by fixing the currency value, thus eliminating any distortion caused by inflation or deflation.

What are the two ways to adjust nominal GDP to reflect price changes?

We account for this using real GDP, which is a measure of GDP that has been adjusted for the price level. In this way, real GDP is a truer measure of output in an economy. There are two approaches to adjusting nominal GDP to get real GDP: 1) using the same prices every year or 2) using the GDP deflator.

What is the difference between nominal and real variables?

A basic tenet of macroeconomics and monetary economics is the difference between nominal variables and real variables. Nominal variables are expressed in current market prices. Real variables are adjusted to reflect the changing purchasing power of money over time (inflation or deflation).

Is nominal GDP always higher than real GDP?

Real GDP is equal to the economic output adjusted for the effects of inflation. Nominal GDP is economic output without the inflation adjustment. Nominal GDP is usually higher than real GDP because inflation is typically a positive number.

How does actual GDP differ from real GDP?

When the GDP is estimated at current prices, it exhibits Nominal GDP , whereas Real GDP is when the estimation is made at constant prices. Both Nominal and real GDP are considered as a financial metric for evaluating country’s economic growth and development.

How do you calculate real GDP?

One needs to first calculate Nominal GDP either by using income method,expenditure method or production method.

Find out the deflator which shall be provided by the government of that economy

Now divide the nominal GDP computed in step 1 by deflator gathered in step 2 to arrive at Real GDP.

From statistical and census report one can find out the population of the country.

The final step is to divide the Real GDP by the population which shall yield Real GDP per capita.

What will increase real GDP?

There is high inflation condition in the economy. This will automatically increase the nominal GDP without any real increase in GDP.(as prices of all goods and services will be increased). real GDP will decrease only when there is negative GDP growth. This will reduce the GDP size of the economy.