What is the difference between nominal GDP and real GDP?

The difference is in the way both GDP are measured.

Suppose we want to differentiate between the nominal and real GDP of the United States in the year 1995.

Here are the statistics of the real GDP:

• NOMINAL GDP

This is the GDP that includes all the inflation (usually) or deflation that a market experiences over a year.

Now, as you know, inflation is different every year so as it is a part of the nominal GDP, you can't have a reliable way to compare a GDP of one year to some other year. Because inflation does not mean that economic growth has taken place.

So a nominal GDP is usually more than the actual GDP as the inflation increases its value.

The real GDP is the actual GDP that represents the actual economic growth that happened as it is without the affects of inflation.

• REAL GDP

So usually, a GDP figure (nominal GDP) has a high value because of the effect of inflation.

So to come to the lower value of the real GDP, the nominal GDP value is deflated (decreased) by a tool known as the GDP Deflator .

This enables us to compare the GDP of one year to other years.

Note: The GDP Deflator works by taking one year as the base year. This can be taken at random.

The value of the base year's nominal GDP is taken. Then the GDP of all other years are compared to the GDP value of the base year.

So the GDP of all other years when passed through a GDP Deflator become the real GDP.

In the case above, the real GDP of 1995 is approximately $10 trillion. But the nominal GDP is obviously higher than this as inflation will be added to it.

And in the statistics above, the base year is 2009.

So for example, if the base year is chosen to be 1970, then the statistics of the real GDP will not be exactly the same.