Nominal GDP and Real GDP
Nominal GDP is defined as the GDP evaluated at current market prices. therefore, the nominal GDP includes all of the changes in market prices that have occurred during the current year due to inflation or deflation. Inflation is defined as a rise in the overall price level, and deflation is defined as a fall in the overall price level. in other to remove the effect of changes in the overall price level, real GDP is used.
Real GDP is defined as the GDP evaluated at the market prices of any base year. For example, if 2013 is chosen as the base year, then real GDP for 2014 is calculated by taking the quantities of all goods and services produced in 2014 and multiplying them by the prices of 2013.
Dividing the nominal GDP by the GDP deflator and multiplying it by 100 would then give the figure for real GDP. The formula to calculate real GDP is as follows :
Real GDP = Nominal GDP/GDP Deflator * 100
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