To understand how an economy of a country is doing, we need to look at the Gross Domestic Product (GDP). There are mainly two types of GDP that are used to measure the economic health of a country. These are nominal GDP and real GDP. Both these measures have their advantages and disadvantages, so we need to know what exactly they represent to use them effectively.
What is Nominal GDP
Nominal GDP is defined as the total market value of all final goods and services produced in a country in a given year. This figure is usually calculated using the prices prevailing in that particular year, therefore it does not account for inflation.
What does Nominal GDP represent
Nominal GDP measures an economy as per its current prices. This helps us to know how much money is circulating in the market and gives a glimpse of the value of goods and services produced by that country.
What is Real GDP
Real GDP is defined as the total market value of all final goods and services produced in a country in a given year, after accounting for inflation. This means that the GDP is measured using constant prices to remove the effect of inflation on economic growth.
What does Real GDP represent
Real GDP provides a true picture of the growth rate of an economy as it is measured by taking inflation into account. It helps us to know how much value an economy produces as compared to its past levels.
When should we use Nominal GDP
Nominal GDP is the right measure to be used when we want to know the exact current measures of an economy. It helps us in knowing how much money is circulating and gives a glimpse of the value of goods and services produced by that country.
When should we use Real GDP
Real GDP is the right measure to be used when we want to know an economy’s growth rate as compared with its past levels. It helps us in knowing how much value an economy produces as compared to its past levels.
Key differences between Nominal GDP and Real GDP
While both these figures have their pros and cons, it is important to understand the key differences between Nominal GDP and Real GDP as this will help us choose the right one. Here are a few points that can be used as a guide
- Nominal GDP represents the economy as per its current prices while real GDP accounts for the inflation in the economy.
- Real GDP is always more than nominal GDP when prices are increasing, on the other hand when prices are decreasing real GDP is always less than nominal GDP.
- Nominal GDP measures the production of an economy in a year, while real GDP measure an economy’s growth by taking inflation into account.
- Real GDP is considered to be a better measure of measuring economic growth as it takes inflation into account, while nominal GDP does not take it into account.
In this article, we have discussed the basic differences between nominal GDP and real GDP and saw when to use each of them. An individual needs to understand these concepts as it will help him/her in choosing the right measure which can be used according to their needs.
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