Nominal GDP or Real GDP: Did Output Grow or Did Prices Just Rise?
Nominal GDP mixes output and price changes. Real GDP removes the price effect to focus on production volume.
Nominal GDP
Values current production using current-period prices, so it can rise because output increased, prices increased, or both.
Real GDP
Values production using constant or base-period price concepts, isolating changes in actual output more effectively.
GDP deflator
The deflator relates nominal GDP to real GDP and provides a broad measure of price changes for domestically produced final goods and services.
Growth interpretation
A large increase in nominal GDP with little increase in real GDP can indicate that much of the change came from prices rather than additional production.
The takeaway
Use real GDP to analyze output growth. Use the GDP deflator to compare nominal and real GDP and measure broad price-level change.
Related Summit guides
FAQ
Can nominal GDP rise when real output is unchanged?
Yes.
Does real GDP remove much of the price effect?
Yes.
Does the GDP deflator relate nominal and real GDP?
Yes.