What is the difference between Real GDP and Nominal GDP?

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pohnpei397 eNotes educator| Certified Educator

Nominal GDP is the actual value of the final goods and services produced in a country in a given year.  So it is the measure, more or less, of how much stuff the country has produced.

But NGDP does not really help you understand how much your country's economy has grown.  That's because it uses the prices from the year it is measuring.  So if prices go up, the value of NGDP goes up even if you are making the same amount of things.

So we use RGDP to make up for that problem.  RGDP measures the GDP when controlling for inflation (for the change in price level).  So that way you can actually compare how valuable the output has been from year to year.