Nominal GDP Definition

WRITTEN BY PAUL BOYCE | Updated 18 December 2020

What is Nominal GDP

Nominal GDP is the total economic output of a nation using current prices. In other words, it is the measurement of all the goods and services a country produces, in prices, at the time they are made. For example, a bag of chips would have sold for a few cents back in the 1980s. Those few cents would classify as nominal GDP. Today, those same bags of chips are worth over $2. Again, that $2 is counted within the nominal GDP calculation.

So nominal GDP considers all the goods and services produced at the time it was made or sold. It highlights economic growth, but only in current values. So if the price of a bag of chips increases by 5 percent, it would see an increase in economic output by the same amount. The issue with this is that it not only factors in the growth of economic output but also increases prices.

Nominal GDP is the most basic form of economic measurement. It takes all the goods and services the economy produces and provides a monetary value for such. For example, in year 1, the US produces 100 apples which are worth $50 in total. This is the only thing it produces, so its nominal GDP is $50. In year 2, it produces 100 apples again, but due to inflation, these are now worth $55 – an increase in prices by 10 percent. The nominal GDP in year 2 is $55 as it considers current prices. Although there was no increase in the production of apples, it would suggest that there was a 10 percent increase in economic growth – because inflation was not considered.

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How to Calculate Nominal GDP

Nominal GDP can be calculated using the formula:

Quite simply, nominal GDP is Gross Domestic Product using current prices. So it factors in both growth in quantity and prices. For example, the US produces 100 motor vehicles in year 1 at a value of $2.5 million. In year 2, it produces 110 cars at a price of $3 million.

Year 1 nominal GDP = $2.5 million

Year 2 nominal GDP = $3 million

In this example, nominal GDP has increased by 20 percent. However, the production of cars has only increased from 100 to 110 – which is 10 percent. So although we can see output has increased, we can also see that a proportion of the increase in nominal GDP is attributable to an increase in prices.

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Nominal vs Real GDP

The main difference between nominal and real GDP is that real GDP is adjusted for inflation, whilst the nominal GDP includes both economic growth as well as increases in prices. For example, in year 1, Country X produces 50 apples, 30 pears, and 20 bananas for a total of $500 – which is its nominal GDP. In year 2, it produces 60 apples, 35 pears, and 22 bananas for a total of $700.

Year 1 nominal GDP = $500

Year 2 nominal GDP = $700

This shows that nominal GDP increased by 40 percent in the year. However, it doesn’t consider the impact that inflation has had. In other words, how much of that growth is attributable to increases in economic efficiency and productivity.

During the period, inflation was 5 percent. Real GDP would therefore factor this in.

Year 1 Real GDP = $500

Year 2 Real GDP = $700 / (1.05 aka 5 percent) = $667

Once inflation is considered, we can see that the true economic growth – so the increase in the number of goods produced – is 33.4 percent.

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