Gross Domestic Product measures the total value of final goods and services produced within the domestic territory of a country during a year. However, GDP can be measured in two ways:
The distinction between the two is important because prices change over time. If GDP increases, it may be because:
Therefore, to understand the real growth of an economy, we need to distinguish between nominal and real GDP.
In India, economic growth is measured by real GDP i.e., GDP at constant Market Prices.
Current Prices
Constant Prices
Increase Only in Prices
Increase in Actual Production
Nominal GDP and Real GDP help us understand economic growth more clearly. Nominal GDP measures output at current prices and therefore includes the effect of both production and price rise. Real GDP, on the other hand, measures output at constant prices and removes the effect of inflation.
Therefore, Real GDP is a better indicator of actual economic growth because it shows whether the economy is really producing more goods and services. Nominal GDP shows the money value of output, while Real GDP shows the real increase in production.
1. What is Nominal GDP?
Nominal GDP is the value of final goods and services produced within the domestic territory of a country, measured at current prices.
2. What is Real GDP?
Real GDP is the value of final goods and services produced within the domestic territory of a country, measured at constant prices. It removes the effect of changes in prices.
3. What is the main difference between Nominal GDP and Real GDP?
Nominal GDP reflects changes in both prices and production, whereas Real GDP isolates changes in the actual volume of production by holding prices constant.
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