Question

Explain Nominal GDP versus real GDP and provide an example.

Answer 1

Nominal GDP — When GDP for the current year is estimated at current year prices, then it is nominal. It means the entire money value of final goods and services produced in the domestic territory (GDP) measured at current prices. Nominal GDP is not a true measure of economic growth as it may increase due to a price rise .

Real GDP — It is estimated at constant ( base year ) prices. If we estimate the value of domestic output at a base year prices ( not current year prices). Real GDP increases only when output increases, so it is a true measure of economic growth to a great extent.

Example — Let the economy produces only two goods x and Y;

Year	Qx	PX	Qy	Py	Nominal GDP	Real GDP
2015 (base year)	100	50	20	30	(100×50)+(20×30)=5600	5600 ( same price and quantity)
2029	75	150	15	50	(75×150)+(15×50)=12000	(75×50)+(15×30)=4200 Current year quantity but base year prices)

So the increase in the nominal GDP is just due to rise in prices and not due to increase in the output. The real GDP reveals that output infact decreased in the year of 2019.