Why has nominal GDP increased faster than real GDP in the United States over time?
Gross Domestic Product refers to the value of a country’s goods and services produced in a financial year. There is a difference between the nominal Gross Domestic Product and the real Gross Domestic Product of a country.
Nominal Gross Domestic Product reflects the value of the goods and services produced in a country in a financial year with no adjustment for inflation. Nominal Gross Domestic Product reflects the current prices in the marketplace.
Real Gross Domestic Product reflects the value of the goods and services produced in a country in a financial year adjusted for inflation. Because the real Gross Domestic Product accounts for inflation, that figure will be lower than the nominal Gross Domestic Product. The figure for nominal Gross Domestic Product is higher than the figure for real Gross Domestic Product because inflation is subtracted from the total Gross Domestic Product to get the real Gross Domestic Product figure.
Real Gross Domestic Product is generally viewed as a more accurate view of how a country’s economy is growing. This figure makes it easier to compare economic growth over a period of time.
Nominal GDP is a measure of productivity of an economy and is the sum total of all the products and services generated by the economy in a given period.
Real GDP, on the other hand, is the measure of productivity corrected for inflation.
These two are related as:
GDP deflator = (nominal GDP/Real GDP) x 100
A value of more than 100 represents inflation, while a value of less than 100 refers to deflation (fall in prices) in the economy.
Because of inflation in the US economy over time, nominal GDP has risen faster than the real GDP. For example, a phone that someone bought for $100 in 2014 is available for $105 in 2015 because of 5% inflation. The nominal cost of the phone is $105, but the real cost (corrected for inflation) is still $100.
Nominal GDP also increases because of increased productivity over time (this will also increase real GDP), apart from the cost increase due to inflation (which will not affect the real GDP). And hence the nominal GDP of the US has risen much faster than the real GDP.
The reason for this is that over time there has been inflation in the United States. Whenever there is inflation, nominal GDP will increase faster than real GDP will.
Nominal GDP of the US is simply the output of the nation's economy multiplied by the prices (in current dollars). If the US economy were to produce exactly the same amount of goods and services in one year as it had in the previous year, the nominal GDP would still rise because inflation would mean that those same goods and services cost more in the second year. However, in such a case, real GDP would not rise because real GDP controls for inflation.
Over time, the RGDP of the US has risen because we have experienced economic growth. However, NGDP has risen more quickly because we have also experienced inflation.
Gross Domestic Product or GDP represents the total value of products that are manufactured and sold, but not resold during the year. GDP includes only products that are sold through the market in a free market economy. GDP does not include products that consumers do not purchase. The total of expenditures on every product consumed at current prices equals nominal GDP. Nominal GDP has increased faster than real GDP in the United States, because as prices increase over time, the inflation rate is higher. This means that the price index is greater than unity (nominal GDP/real GDP=price index). When an economy has GDP that increases faster than nominal GDP, its prices are decreasing as price index is less than unity.