What is the difference between real and nominal GDP?

Real GDP and nominal GDP are two different measures used to assess the economic performance of a country. The main difference between real and nominal GDP lies in how they account for changes in prices over time.

Nominal GDP is the total value of all final goods and services produced within a country's borders during a specific period, typically a year, using current market prices. It represents the current dollar value of the economy's output and is not adjusted for inflation. Nominal GDP reflects both changes in the quantity of goods and services produced and changes in their prices.

Real GDP, on the other hand, is a measure of the total value of all final goods and services produced within a country's borders during a specific period, using constant prices from a base year. Real GDP is adjusted for inflation, allowing for a more accurate comparison of economic output over time. By using constant prices, real GDP isolates the changes in the quantity of goods and services produced, providing a clearer picture of the economy's actual growth or contraction.

The difference between real and nominal GDP is primarily due to changes in the overall price level, which is captured by the inflation rate. When the economy experiences inflation, nominal GDP tends to overstate the growth in output because it includes the price increases. In contrast, real GDP adjusts for inflation, providing a more accurate measure of the economy's actual production levels.

In summary, nominal GDP represents the current dollar value of the economy's output, including changes in both quantity and prices, while real GDP adjusts for inflation and measures the economy's output using constant prices, allowing for a more accurate assessment of economic growth or contraction over time.