What would it mean if an economy had real GDP increasing faster than nominal GDP?

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Kale Emmerich eNotes educator | Certified Educator

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Real GDP is calculated using historical values. Using these values, we can more accurately measure and understand inflation, because these measurements have already been completed and we know how they trend. Nominal GDP is the opposite: it uses today's values to estimate GDP, and it can't properly account for inflation because we don't have all the data just yet. In a standard economy with typical inflation, the nominal GDP will increase faster than the real GDP, because inflation is pushing prices higher.

However, if the real GDP is growing faster, that means that the nominal GDP is experiencing deflation—the value of currency in the market is getting lower, and the historical values are higher than the current ones. If the prices in an economy were higher the previous year, then deflation is occurring.

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