Differences between Nominal and Real GDP

Gross Domestic Product is the value of all the goods and services produced in a country. The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country’s economy. If GDP of a country is negative for two consecutive quarters then it is treated as sign of recession.

Measuring GDP is a difficult task; the calculation of GDP can be done in one of two ways: either by adding up what everyone earned in a year which is called income approach, or by adding up what everyone spent which is called expenditure method. However both measures should arrive at approximately the same total. Generally, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.

GDP can be expressed as real GDP or nominal GDP, for understanding differences between real and nominal GDP let’s first look what is real and nominal implies. Nominal means it includes inflation and real means it excludes inflation. Hence nominal GDP of 10 percent and real GDP of 5 percent imply that inflation is 5 percent in that particular year.

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