Introduction to Nominal GDP
As you must already know, GDP or gross domestic product of a country is the monetary value of all goods and services that are produced in the country. However, this GDP can be divided into two—real GDP and nominal GDP.
While GDP measures the final monetary value of the products and services adjusting the price changes and inflation, the nominal GDP includes the changes like inflation which reflects the change of prices in the economy.
What is Nominal GDP?
Nominal GDP assesses the production of goods and services in an economy but it includes the current prices of goods and services in its calculations. As the nominal GDP does not adjust the changing prices of the goods and services like the real GDP, nominal GDP can inflate the growth figure.
As the nominal GDP measures the current prices at which goods and services are sold, it may reflect the rise in prices as opposed to the growth in the amount of goods and services. This can make the nominal GDP look bigger as the effects of inflation will be clearly visible on it.
Inflation is a negative effect on a nation’s economy as it indicates an increase in price of one or all products and services in an economy. This rise in prices of the economy means the consumers have to spend more to satisfy their requirements. This has a negative effect on both the sellers and the consumers.
How is Nominal GDP different from Real GDP?
Both the nominal GDP and the real GDP are important when calculating an economy’s Gross Domestic Product. Economists use both nominal GDP and real GDP as reference points when comparing the GDP over different periods of time.
Nominal GDP is usually considered by economists when comparing different quarter outputs within a year as it includes the price changes caused by inflation. But when comparing the GDP across more than one year, the economists consider the real GDP because by removing inflation it will only show the change in output volumes over the years.
The only limitation while using nominal GDP is that when an economy faces deflation, which is a decrease in prices, the nominal GDP may come out as negative which might reflect negative growth in the overall economy. This negative nominal GDP may indicate a recession in the economy when in reality there is positive production growth.
Therefore, when measuring an economy’s GDP both nominal and real GDP should be used.
