Real GDP vs.

Nominal GDP In order to deal with the ambiguity inherent in the growth rate of GDP, macroeconomists have created two different types of GDP, nominal GDP and real GDP.

Nominal GDP is the sum value of all produced goods and servicesat current prices. This is the GDP that is explained in the sections above. Nominal GDP is more useful than real GDP when comparing sheer output, rather than the value of output, over time.

Real GDP is the sum value of all produced goods and services at constant prices. The prices used in the computation of real GDP are gleaned from a specified base year. By keeping the prices constant in the computation of real GDP, it is possible to compare the economic growth from one year to the next in terms of production of goods and services rather than the market value

of these goods and services. In this way, real GDP frees year-to-year comparisons of output from the effects of changes in the price level. The first step to calculating real GDP is choosing a base year. For example, to calculate the real GDP for in year 3 using year 1 as the base year, use the GDP equation with year 3 quantities and year 1 prices. In this case, real GDP is (10 X $1) + (9 X $6) = $64. For comparison, the nominal GDP in year 3 is (10 X $2) + (9 X $6) = $74. Because the price of bananas increased from year 1 to year 3, the nominal GDP increased more than the real GDP over this time period.