Relationship With Nominal GDP
Real GDP is an example of the distinction between real vs. nominal values in economics. Nominal gross domestic product is defined as the market value of all final produced in a geographical region, usually a country. That market value depends on the quantities of goods and services produced, and their respective prices (referred in lower case below). The relation between the nominal and real values is given by the following relation:
- Nominal GDP = Real GDP x Price,
where Price stands for the price index of GDP.
If a set of real GDPs from various years are calculated, each using the quantities from its own year, but all using the prices from the same base year, the differences in those real GDPs will reflect only differences in volume.
An index called the GDP deflator can be obtained by dividing, for each year, the nominal GDP by the real GDP. It gives an indication of the overall level of price change (inflation or deflation) in the economy.
- GDP deflator for year t = nominal GDPt / Real GDPt
Nomenclature: "GDP" may refer to "nominal" or "current" or "historical" GDP, to distinguish it from the real GDP. The real GDP is sometimes called "constant" GDP because it is expressed in terms of constant prices. Depending on context, "GDP" may also refer to real GDP,
Real GDP growth on an annual basis is the nominal GDP growth rate adjusted for inflation. It is usually expressed as a percentage.
Read more about this topic: Real Gross Domestic Product
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