GDP measures the total value of goods and services in an economy over a period of time. Real GDP considers the effects of inflation, while nominal GDP does not. Real GDP is adjusted to reflect the difference in value due to inflation, resulting in a lower figure than nominal GDP.
Gross Domestic Product (GDP) involves a calculation of the total value of goods and services generated within an economy over a stated or identified period of time. The main difference between real GDP and nominal GDP is that nominal GDP does not consider how inflation or deflation affects the price of goods over time. Conversely, real GDP involves a calculation of the price increase that is the consequence of inflation or deflation in the economy.
Real GDP and nominal GDP are separated only by consideration of price increases due to inflation. Usually, GDP is measured periodically at the end of specific business cycles. The business cycle or period under review is usually quarterly. At the end of each quarter, economists calculate the aggregate level of prices of goods and services for that period in order to arrive at a figure that is used as a basis for comparison with other economic cycles. The result of this figure will speak a lot to economists or other interested parties about the state of the economy, which is usually where real GDP and nominal GDP are separated.
An increase in the general price for the period under review indicates that there has been a change in the dynamics of the laws of supply and demand. This usually indicates an inflationary increase in consumer demand for goods and services leading to an increase in the price level. Other factors that can cause price levels to rise is an increase in the price of goods and services by companies in order to make up for shortfalls in their profits. An essentially monopolistic market can also contribute to price increases through arbitrary price increase actions by organizations without the constant influence of a competitive market.
Real GDP and nominal GDP give different results than the total value of goods statistics are calculating. Economists use nominal GDP to find out the general price of goods and services for the period without taking into account other effects. However, don’t rely on this result alone, because it would be higher than real GDP. Real GDP is usually adjusted by taking into account the effects of inflation and making appropriate adjustments to reflect the difference in value. Therefore, the real GDP result is often lower than the nominal GDP result.
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