GDP is measured in dollars (GDP = C + I + G + NX), and the value of a dollar changes as prices rise. If GDP grows 6% in a year, did the economy make 6% more stuff, or did prices go up? To separate the two, we need percent change and a fixed set of prices.
Key idea
Nominal GDP values each year's output at that year's prices. Real GDP values each year's output at the prices of one base year. Because the prices are held fixed, real GDP changes only when the quantities produced change.
Why it works
Suppose an economy makes only pizzas. Last year it made 100 at \$10; this year it makes 100 at \$12. Nominal GDP rose from \$1,000 to \$1,200, a 20% rise, yet not one more pizza was made. Valuing this year's 100 pizzas at last year's \$10 price gives real GDP of \$1,000: no growth, which matches what happened. Real GDP answers "how much did we make?"; nominal GDP mixes that with "how much did prices change?"
Worked examples
Worked example: Real GDP with two goods
An economy makes pizzas and books. In 2023 (the base year): pizzas \$10, 100 made; books \$20, 50 made. In 2024: pizzas \$11, 105 made; books \$20, 52 made. Find nominal and real GDP for 2024.
- Nominal 2024 (2024 prices × 2024 quantities): $11 \times 105 + 20 \times 52 = 1{,}155 + 1{,}040 = 2{,}195$.
- Real 2024 (2023 prices × 2024 quantities): $10 \times 105 + 20 \times 52 = 1{,}050 + 1{,}040 = 2{,}090$.
- Real 2023 (base year): $10 \times 100 + 20 \times 50 = 2{,}000$.
- Real growth: $\dfrac{2{,}090 - 2{,}000}{2{,}000} \times 100 = 4.5\%$. Nominal grew $\dfrac{2{,}195 - 2{,}000}{2{,}000} \times 100 = 9.75\%$; the rest was higher prices.
Answer: Nominal \$2,195; real \$2,090 (4.5% real growth)
Worked example: A shortcut
Nominal GDP rose 7% and prices rose 3%. About how much did real output grow?
- Real growth $\approx$ nominal growth − inflation.
- $7\% - 3\% = 4\%$.
Answer: About 4%
Common mistake
Reading a rise in nominal GDP as more production. It may be only higher prices. Check: when you see a GDP number, ask "nominal or real?" Growth comparisons over time should use real GDP.
See it with real data: real GDP for the United States on the Economic Data page (in chained dollars, the Bureau of Economic Analysis's refinement of the base-year method). Recessions are shaded.