The Key Difference Between Real GDP and Nominal GDP

Real GDP vs Nominal GDP
Feature	Real GDP	Nominal GDP
Definition	The total market value of all final goods and services produced in a country, adjusted for inflation or deflation.	The total market value of all final goods and services produced in a country, measured at current prices without adjusting for inflation.
Price Adjustment	Accounts for changes in price levels by using constant base-year prices.	Uses current market prices, so includes the effects of price changes.
Purpose	Measures the true growth of an economy by isolating quantity changes.	Measures the overall economic output including price level changes.
Effect of Inflation	Inflation effects are removed, so growth reflects real output.	Inflation increases nominal GDP even if actual output remains the same.
Measurement	Calculated using constant prices from a selected base year.	Calculated using current prices in the year of measurement.
Economic Analysis	Preferred for comparing economic performance over time.	Useful for assessing current economic size but misleading for comparisons across years.
Growth Rate	Provides a more accurate representation of economic growth.	Growth rate may be overstated due to inflation effects.
Units	Expressed in constant currency units (real terms).	Expressed in current currency units (nominal terms).
Use in Policy Making	Helps policymakers gauge real economic progress and make informed decisions.	Used to assess overall economic size and current market conditions.
Volatility	Less volatile as price changes are excluded.	More volatile due to fluctuating prices and inflation.
Example	If prices rise by 5% but output remains the same, Real GDP stays constant.	If prices rise by 5% but output remains the same, Nominal GDP increases by 5%.
Relation to GDP Deflator	Real GDP = Nominal GDP / GDP Deflator (adjusted for inflation)	Nominal GDP = Real GDP × GDP Deflator
Impact on Income Measurement	Reflects true income changes after removing inflation impact.	May overstate income due to inflation effects.
Interpretation	Indicates actual increase in goods and services produced.	Indicates increase in value which could be due to price or quantity changes.
Summary	Real GDP provides a clearer picture of economic growth by excluding inflation.	Nominal GDP shows economy’s value at current prices but can be misleading over time.