2.6 Real v. Nominal GDP
Real GDP values output at constant base-year prices, isolating changes in production; nominal GDP uses current prices, so it rises with inflation too.
Nominal GDP values this year's output at this year's prices, so it can rise from producing more OR from prices going up. Real GDP values output at constant base-year prices, stripping out inflation so changes reflect actual production. Always use real GDP to compare output across years or to measure growth.
The GDP deflator connects them: GDP deflator = (nominal GDP ÷ real GDP) × 100, and rearranged, real GDP = (nominal GDP ÷ deflator) × 100. In the base year, nominal and real GDP are equal and the deflator is 100.
A quick exam check: if nominal GDP rose 6% while the price level rose 4%, real output grew only about 2%. When a question says 'GDP increased' and asks whether the country produced more, the answer depends on whether that was real or just nominal growth.
Key terms for 2.6
Practice the math
Using nominal GDP growth as evidence the economy produced more. Nominal GDP can rise on inflation alone — deflate it first (real = nominal ÷ price index × 100) before making any claim about output.
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