Study Notes
Explaining the Difference between Nominal and Real National Income (GDP)
- Level:
- AS, A-Level, IB
- Board:
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 8 Apr 2023
It is important to distinguish between the nominal and real value of a country's national output and income.
Nominal GDP measures the value of all final goods and services produced in a country in a given year, using the prices of that year. Real GDP measures the value of all final goods and services produced in a country in a given year, using the prices of a base year.
The difference between nominal and real GDP can be calculated using the following formula:
Real GDP = Nominal GDP / GDP Deflator
The GDP deflator is a measure of the prices of all final goods and services produced in a country in a given year, relative to the prices of a base year.
For example, let's say that the nominal GDP of the United Kingdom in 2022 was £2 trillion, and the GDP deflator was 120. This means that the prices of all final goods and services produced in the United Kingdom in 2022 were 20% higher than the prices in the base year of 2020.
The real GDP of the United Kingdom in 2022 would be calculated as follows:
Real GDP = Nominal GDP / GDP Deflator = £2 trillion / 1.2 = £1.67 trillion
This means that the real value of all final goods and services produced in the United Kingdom in 2022 was £1.67 trillion, which is 20% lower than the nominal value of £2 trillion.
Nominal GDP is often used as a measure of economic growth, as it shows the total value of goods and services produced in a country in a given year. However, real GDP is a better measure of economic growth, as it shows the change in the actual value of goods and services produced in a country, after taking inflation into account.
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