Nominal GDP
What is Nominal GDP?
Nominal GDP is the value of all final goods and services produced in a given year, evaluated at current-year prices.
It reflects changes in both quantity and price levels, so increases can result from inflation rather than actual growth in output. It is not adjusted for changes in the price level and can overstate economic growth during inflationary periods.
Nominal GDP: a worked example
A hypothetical economy produces only bicycles and pizzas. In Year 1 it makes 100 bicycles at $200 each and 500 pizzas at $10 each, so nominal GDP is 100 × $200 + 500 × $10 = $20,000 + $5,000 = $25,000. In Year 2 the same factories turn out exactly 100 bicycles and 500 pizzas again, but the bicycle price rises to $240 and the pizza price to $12. Nominal GDP becomes 100 × $240 + 500 × $12 = $24,000 + $6,000 = $30,000. Nominal GDP grew by ($30,000 - $25,000) / $25,000 × 100 = 20 percent while not one extra bicycle or pizza was produced. Every dollar of that growth is price, which is why nominal GDP cannot answer whether an economy made more stuff.
The mistake students make with nominal gdp
Nominal GDP is assumed to sit above real GDP always, since rising prices feel like the normal case. The two are equal in the base year, where the deflator reads exactly 100. For a year before the base year nominal GDP is normally the smaller of the pair, because prices back then were below base year prices, and the same happens after a stretch of deflation. Handed a deflator of 90, a student who insists real GDP must be lower will divide the wrong way and lose the point.
Nominal GDP questions
How do you convert nominal GDP to real GDP?
Divide nominal GDP by the GDP deflator, then multiply by 100. Nominal GDP of $30,000 with a deflator of 120 gives ($30,000 / 120) × 100 = $25,000 of real GDP measured in base year dollars. Skipping the multiplication leaves $250, a figure a hundred times too small and a frequent lost mark. The same procedure works with any price index scaled so the base year equals 100.
Can nominal GDP rise while the economy shrinks?
Nominal GDP can rise even as output falls, provided prices climb faster than production drops. If real output falls 4 percent while prices rise 10 percent, nominal GDP changes by 0.96 × 1.10 = 1.056, a gain of 5.6 percent. Reading that headline as growth gets the story exactly backwards, since fewer goods were produced. Comparing real GDP across the two years is the only way to see the contraction.
Does nominal GDP include inflation?
Nominal GDP includes inflation by construction, because it values each year's output at that same year's prices. When prices rise, the measured total climbs even with quantities unchanged. Real GDP strips inflation out by valuing every year's output at one fixed set of base year prices, so only quantity changes can move it. Dividing nominal GDP by real GDP and multiplying by 100 isolates the price component as the GDP deflator.
Related terms
Common comparisons
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