Nominal GDP and Real GDP

NOMINAL GDP:-

Nominal GDP is defined as the GDP at current market prices. It includes all the changes in market prices. If the price level increases remaining the output constant, nominal GDP increases and vice-versa. Nominal GDP gives the misleading impression of the living standard and economic performance of the country. It does not reflect the accurate economic performance of the country and living standard of people.

It is calculated as follows:-

Nominal GDP = P1Q1+P2Q2+………… +PnQn

Where, P1, P2, Pn = current market prices of goods and services.

Q1, Q2, Qn = quantities of the goods and services produced in the current year.

REAL GDP:-

                    Real GDP is defined as the GDP of the current year evaluated at the market price of any base year. In other words, the real GDP is the GDP calculated at a constant price. Real GDP is used to make a correct estimate of the living standard and the economic performance of the country. Nominal GDP changes overtime but real GDP remains the same.

It is calculated as follows:-

Real GDP = P1Q1 + P2Q2 +………. +PnQn

Where, P1, P2, Pn = base year's price of the goods and services.

Q1, Q2, Qn = quantities of the goods and services produced in the current year.

GDP DEFLATOR:-

                      The GDP deflator is defined as the measure of the relative changes in the current level of prices in comparison to the base year prices. It is the ratio of nominal GDP to real GDP multiplied by 100. It is used to calculate the change in the price level or the rate of inflation in the economy.

GDP deflator = Nominal GDP ÷ Real GDP × 100

Rate of inflation = change in GDP deflator ÷ GDP deflator of previous year × 100.

DIFFERENCE BETWEEN REAL GDP AND NOMINAL GDP:-

Basis	Real GDP	Nominal GDP
Market price	Real GDP is calculated at constant market price.	Nominal GDP is calculated at current market price.
Effects of change in price and output	The change in real GDP is due to the change in output.	The change in nominal GDP is due to the change in price.
Economic performance	It reflects the actual performance of an economy.	It does not reflect the actual performance of an economy.
Calculation	It is calculated as follows:- Real GDP = P1Q1 + P2Q2 +………. +PnQn Where, P1, P2, Pn = base year's price of the goods and services. Q1, Q2, Qn = quantities of the goods and services produced in the current year.	It is calculated as follows:- Real GDP = P1Q1 + P2Q2 +………. +PnQn Where, P1,P2,Pn = base year's price of the goods and services. Q1,Q2,Qn = quantities of the goods and services produced in the current year.