Is nominal GDP always higher than real GDP?

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pohnpei397 eNotes educator| Certified Educator

Nominal gross domestic product (nGDP) is usually higher than real GDP, but this is not necessarily the case.  NGDP can be higher than rGDP if prices have been declining in a country.

Nominal GDP is a measure that looks only at how things are right now.  It takes the goods and services that an economy produces and multiplies them by their current prices.  This tells us the current value of the new goods and services created in our economy this year.

Nominal GDP does not, however, show how we are doing compared to previous years.  This is why we use real GDP at times.  Since nGDP looks only at today’s prices, it can rise simply because prices go up, and not because we are producing more things.  In such a case, nGDP will be higher than rGDP.  But this is not necessarily the case.  Imagine an economy that is experiencing deflation.  In such an economy, prices drop.  If the economy produced the same amount of goods in 2015 as it did in 2010, but the  prices were lower in 2015, the country’s nGDP for 2015 would be lower than its real GDP (in 2010 dollars).

Since inflation is more common than deflation, we are used to nGDP being higher than rGDP.  But the opposite situation is possible if deflation occurs.

thetall eNotes educator| Certified Educator

The Real Gross Domestic Product of a country refers to the total economic output adjusted for inflation or deflation. The Nominal Gross Domestic Product (GDP), on the other hand, is not adjusted for inflation or deflation. The reason why the Nominal GDP appears higher than the Real GDP is that the Real GDP is adjusted for inflation, which reduces the total amount. Additionally, the Nominal GDP is higher due to the effects of higher product prices (inflation) and not necessarily a factor of increased volumes.

However, it is important to note that a higher Nominal GDP is not a constant. An economy going through deflation will ultimately affect the Real GDP because by adjusting for deflation, the Real GDP will be higher than the Nominal GDP because prices go down during deflation. Thus, the same economic output in two time periods will show a higher Real GDP compared to the Nominal GDP. There is a possibility of the two scenarios occurring depending on whether the economy is facing inflation or deflation.