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July 8, 2008

The Difference Between “Real” and “Nominal” GDP”

Gross Domestic Product (GDP) enables a national economy to measure its performance. GDP is the market value of all final goods and services produced within a country during a specific time period – usually a year. But be careful. This refers to what’s called “nominal” GDP. That means it doesn’t take into consideration the fact that prices go up and down over time.

In order to make a meaningful assessment of a nation’s performance, we must analyze “real” GDP. That means it’s adjusted for inflation. Or more simply, it does take into account changes in prices.

Consider a country that produces only cigars. (By the way, I confess I have a weakness for a good “stogie”). If the nation produces and sells 100 cigars and charges $10 each, its “nominal” GDP is $1000. Now suppose the following year, everything remains constant except – for whatever reason – it’s able to charge $11. That translates into a “nominal” GDP of $1100.

But is the nation more productive? Of course not…it still makes only 100 cigars a year. Though the market value of the nation’s production, or “nominal” GDP, has changed, “real” GDP has not.

Any suggestions out there for a better way to measure a country’s economic performance?

By: Wade Rousse

Posted by Wade at July 8, 2008 3:55 PM

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