Nominal and Real GDP - Essay Example

Nominal and Real GDP Gross Domestic Product (GDP), as the suggests, is the total of all the products produced by any country. This is good measure to understand the size of an economy. There are references in literature where the GDP of some African countries are equivalent to the revenues of General Motors (GM). This showcases the difference in GDP across the world. Massive economic calculations are required to arrive at these GDP numbers. Irrespective of the methods, GDP is quoted either as Nominal GDP or Real GDP.

The words nominal and real signify the same meaning as in interest rates or any other concept where these are used. As per common belief nominal GDP is the total of all the products and services produced by a country in a particular time span, generally one year, expressed in current prices (NZIER.org, 2006). Nominal GDP technically does not include all the goods and services produced by any country. This would lead to double counting of certain products. To avoid this error, only the final product value is taken into consideration.

In this value the share of intermediaries (Eg: Raw material suppliers) is apportioned according to their value add to the final product. This usage of intermediates to produce a final product is called as intermediate consumption. Hence nominal GDP is the sum total of all the products and services produced in a country in a specific time period minus the intermediate consumption (NZIER.org, 2006). Increase in nominal GDP is not a reflection of actual economic growth according to economists (Baumol and Blinder, 2004).

In nominal GDP, as the current prices are considered, the increase over the previous year is not comparable. Nominal GDP will also show variations according to inflation. If inflation is higher, then nominal GDP is higher. This explains that nominal GDP only reflects changes in prices and does not reflect changes in output levels. Hence GDP is indexed against a base year and the increase from that year is calculated. This GDP expressed in constant prices is called as Real GDP. Once inflation effect is removed from nominal GDP it constitutes Real GDP.

Real GDP is the actual measure of economic growth as it refers to actual volume growth in the domestic output. Inflation can be measured by calculating the difference between the nominal and real GDP using the GDP deflator (Moffatt, 2006).Real and Nominal GDP's (US) for time series 2003 to 2006 presented in quarterly intervals.TABLE B-1.-Nominal Gross domestic product, 2003-2006TABLE B-2.-Real gross domestic product, 2003-2006[Billions of dollars, except as noted; quarterly data at seasonally adjusted annual rates][Billions of chained (2000) dollars, except as noted; quarterly data at seasonally adjusted annual rates]Year or quarterNominal GDPPercent change from preceding period (Nominal GDP)Year or quarterGDPPercent change from preceding period (Real GDP)200310,960.84.7200310,301.02.52004 11,712.56.92004 10,703.53.9200512,455.86.32005 11,048.63.2''''''2003: I10,705.64.42003: I 10,126.01.2 II10,831.84.8 II 10,212.73.5 III 11,086.19.7 III 10,398.77.5 IV11,219.54.9 IV 10,467.02.7''''''2004: I11,430.97.82004: I 10,566.33.9 II 11,649.37.9 II 10,671.54.0 III 11,799.45.3 III 10,753.33.1 IV 11,970.35.9 IV 10,822.92.6''''''2005: I12,173.27.02005: I 10,913.83.4 II12,346.15.8 II 11,001.83.3 III12,573.57.6 III 11,115.14.2 IV12,730.55.1 IV 11,163.81.8''''''2006: I13,008.49.02006: I 11,316.45.6 II13,197.35.9 II 11,388.12.6 III13,322.63.8 III 11,443.52.0Source: Department of Commerce, Bureau of Economic Analysis.

(GPO access)References:1. Baumol William Jack, Blinder Alan Stuart (2004). Economics: Principles and Policy with Infotrac, Thomson South Western, Pg. 448.2. GPO access (2007), Economic Report of the President: 2007 Report Spreadsheet, Table B-1. Gross domestic product, 1959-2006, Table B-2 Real gross domestic product, 1959-2006. http://www.gpoaccess.gov/eop/tables07.html. Accessed on 16th April, 2007.3. Moffatt Mike (2006). What's the difference between Nominal and Real', About: Economics, http://economics.about.com/cs/macrohelp/a/nominal_vs_real.

htm, Accessed on 16th April, 2007.4. New Zealand Institute of Economic Research (2007). GDP: its measurement and meaning, 16 April, 2007. http://www.nzier.org.nz/SITE_Default/SITE_economics_explained/GDP.asp. Accessed on 16th April, 2007