The GDP or gross domestic product of a nation refers to the total monetary value of all goods and services produced within the geographic boundaries of a nation in a particular duration of time. There are two ways of expressing GDP; nominal GDP is the value of goods and services at the prevailing price, while real GDP is estimated by considering prices of a reference year and determining the value of goods and services at the reference price.
Inflation is an increase in the price of goods and services. This is determined by taking a representative sample of goods and services that are produced in a nation and comparing the total cost of the same goods and services at different points of time. A positive value of inflation indicates the price of products in the nation is increasing.
The total value of goods and services in a nation can increase due to two reasons: there are more goods and services being produced, or the same goods and services are being sold at a higher price.
If price levels rise, there is inflation, causing the value of the same products to be higher. As a result, the nominal GDP is higher that the real GDP. The GDP deflator is the ratio of nominal GDP and real GDP. If the GDP deflator has a value greater than 1, nominal GDP is greater than real GDP.
Nominal GDP rises faster than real GDP when prices rise, which is the same as inflation. Also, if the value of GDP deflator is increased, the nominal GDP rises faster than real GDP.