Nominal GDP measures total output in a country using the current currency, while real GDP adjusts for inflation. Nominal GDP can be calculated using the production, expenditure, or income method. Real GDP is useful for comparing economic output over time, and GDP per capita can indicate average productivity changes per worker.
A nominal gross domestic product (GDP) is a measure of total output in a country. The word nominal refers to the units in which output is measured, i.e. the current currency of the country in question. Conversely, a real GDP is basically measured in units of the commons rather than money – in other words, a real GDP is adjusted for inflation. Nominal GDP is typically calculated in one of three ways: method of production, expenditure, or income. A GDP figure expressed in nominal terms can be a convenient measure of current economic activity using a familiar currency.
The first way to calculate nominal GDP is the production method, which is often considered the most straightforward. All goods and services in a country are counted to give the nominal GDP figure. The second method is the expenditure method, which summarizes the expenditure of all citizens on household goods and services. Finally, the income method works by adding up the income received by everyone in a country. While the three methods provide similar figures, some complications can arise from international commercial transactions.
Once a figure for nominal GDP is obtained, it can be left in nominal form or converted to real GDP. Real GDP is useful in comparing economic output between two different times in history. Because inflation alters the intrinsic value of a given amount of money, different nominal GDP data can describe the same level of output at different times. For example, the nominal GDP of the United States was about $521 billion (USD) in 1960 and about $1.03 trillion in 1970. This does not mean that total output nearly doubled in 10 years; rather, output increased slightly and inflation accounted for the rest.
If currency figures of real GDP are desired, they should be given in terms of a base year. Often, real GDP will be given in one-year currency terms, such as “1981 US dollars.” In this way, the figures can be used to meaningfully describe the economic conditions of past eras with an intuitive currency reference. Few people are aware of how much a particular unit of currency was worth several decades in the past. With real GDP figures, past economic phenomena can be described in terms of familiar currency.
GDP per capita is a figure of GDP divided by the total population of the country in question. It can be a useful, though not perfect, measure of average living standards in a country. GDP increases largely due to population expansion, but per capita GDP can indicate average productivity changes per worker.
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