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Explain the difference between nominal and real GDP and why real GDP is necessary to compare...

Explain the difference between nominal and real GDP and why real GDP is necessary to compare prior years’ data.

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Answer #1

The aggregate market value of the output produced in an economy within a year measured at current year prices is called nominal GDP. It is a GDP without the effect of Inflation.

While real GDP is a measure of economic output adjusted for price change. It is measured at constant or base year prices.

The value of nominal GDP is greater than the value of real GDP because while calculating it, the figure of inflation is deducted from the total GDP.

GDP deflator=

Since real GDP is calculated at the base year it is a more accurate figure of growth of an economy.

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