What is GDP? A core element you need to know about, especially when you are talking about economic affairs. Whether you are a common man with curiosity or an economy student.
GDP is an abbreviation of Gross Domestic Production. It is a monetary measure of the final goods and services produced in a specific time. In short, it expresses the output of worth in the country in local currency.
There are two types of GDP: Real GDP and Nominal GDP. Let’s understand the meaning of both and will also see the difference between nominal and real GDP.
First, we will go through the nominal gross domestic product. Why so? That you will understand later.
What is Nominal GDP?
Nominal gross domestic product measures the value of current final goods and services produced in a country during a specific time. Hence, it takes current price changes, changing interest rates, money supply, and inflation into consideration when calculating the country’s GDP.
How to Calculate Nominal GDP?
As we already, nominal GDP is found based on the current market situation. So how will you calculate the nominal gross domestic product of the country?
You will have to get the information about the current quantity of goods and services produced within the country’s boundary and in a period. Then, multiply it with the current market price.
For instance, a country produces tea and coffee within its boundary. So first, we will gather the information on the quantity produced.
Tea – 4 million pounds
Coffee – 6 million pounds
Now we will look at the current market price. Let’s suppose its $4 and $2 per pound for coffee and tea, respectively.
We have all the information, let’s get the results.
(Coffee’s quantity x it’s current market price) + (tea’s quantity x it’s current market price) = Nominal GDP
($4 x 6 million) + ($2 x 4 million) = 32 million.
This is how you can calculate nominal GDP, moving towards, we have Real GDP for learning, and also know how to invest in blockchain.
What is Real GDP?
The real gross domestic product reflects the actual situation of the country’s economic situation, which includes the prospect of inflation or deflation. It is a more reliable calculation than nominal GDP. Without it, the economic growth of the country will seem to be continuously growing while the price is only increasing.
The official definition of Real Gross Domestic Product, according to Wikipedia, “Real gross domestic product is a macroeconomic measure of the value of economic output adjusted for price changes (i.e., inflation or deflation). This adjustment transforms the money-value measure, nominal GDP, into an index for the quantity of total output.”
How to Calculate Real GDP?
So now you know what is real GDP. Why not have a look at its formula? Though it is not as easy as calculating the nominal GDP, a little bit of concentration and you will get the point.
To calculate the real GDP, you must use the numbers of nominal GDP and GDP deflator. (That’s why understanding the nominal GDP first was necessary.)
You know how to calculate nominal GDP, but what about GDP deflator? Let’s first understand what it is?
It reflects inflation and deflation as compared to a specific base year. In the US, BEA calculates GDP and the Deflator for the year.
Real GDP Formula: Nominal GDP/Deflator
Real GDP vs Nominal GDP
It’s time you should understand the difference between nominal and real GDP. Take Heed!
- Nominal GDP shows the current production of the country per the current market price, while Real GDP reflects the actual situation of the economic growth considering the inflation or deflation.
- If you want to calculate the GDP of quarters within a year, nominal GDP is reliable, but when it comes to long term comparing real GDP is ideal. Why? As it considers all the factors affecting the economy.
- If the inflation of the country is in a positive percentage or numbers, the real GDP will be lesser than nominal and vice-versa.
- Calculating both the metrics are necessary. Nominal GDP is a macroeconomic assessment calculation of all the final goods and services produced in consideration of the current market price. In contrast, real GDP adjusts the price changes (inflation or deflation) in the economy.
- Real GDP takes into consideration the government investments, private and public consumption, net foreign trade, outlays, and paid-in construction costs.
- Calculating Nominal GDP is far easier than Real GDP as the later one requires the analysis of base year market price to find the actual output.
Final Overview of Nominal and Real GDP:
This was all you need to know about the difference between the nominal and real domestic gross product. So before wrapping, let’s take a quick ride to look at the concepts covered in the article.
Nominal GDP measures the current growth, while real GDP will reflect the constant one. The higher the nominal GDP higher will be inflation. Real GDP gauges the volume of economic growth.
Want to learn more about finance and its components? Get going to the FinanceShed.