Q:

What is the difference between nominal GDP and real GDP?

A:

Nominal GDP is a measure of the Gross Domestic Product in absolute terms, while real GDP is a measure that factors in the rate of inflation.

The inflation rate changes from year to year in most cases, so using real GDP is a good way to compare the GDP rates of different years. Economists use a metric called the GDP Deflator to determine the real GDP.

Economists use variables such as the GDP to measure the strength of the economy. When they need to compare the GDP rates of different periods, however, using this statistic has problems. This is because the prices for goods and services change over time.

If the GDP rates of growth for the years 1978 and 2008 are the same, for instance, this does not mean that the real value of all goods and services in the country were the same during both periods. Economists need to take the fact that the prices were higher in 2008 than in 1978 into account to compare the two years accurately.

Because prices for products and services tend to rise over time, the inflation rate is positive in most years. For this reason, nominal GDP rates are typically higher than real GDP rates.


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