Nominal GDP is simply the value of all final goods and services produced in a country or in other words it is the current market value of Goods and services. As discussed before the formula for Nominal GDP is as follows
Whereas P and Q are the current market value of a single product.
Now this is a bit tricky for all the newbies of Economics. By definition it is the price of base year with current year Quantity or :
According to this formula we are using the price of a base(constant)year and the quantity of current year. Now why do we really do that ? It is because we are eliminating the effect of Inflation. In other words we use real GDP to eliminate or remove the effect of inflation from the nominal GDP so as to know that is it the production that has increased the level of Nominal GDP or is it just the rise in general Price level which shows the high level of Nominal GDP. Now we also have another formula to calculate the real GDP:
We have another Concept of GDP Deflator here but let us not confuse ourselves at the moment. We need to understand that Real GDP equals the nominal GDP divided by the GDP deflator which actually means that exactly what I said before. This Deflator helps us Deflate the price effect from the nominal GDP that as a result gives us Real GDP. This also means that we can use Real GDP for measuring Growth of an Economy. I will be giving mathematical example for such concepts in the coming posts.
GDP deflator is also called the implicit price deflator for GDP is the ratio of Nominal GDP to real GDP.
Now the GDP deflator measures the price of Output relative to its price in the base year. Which like I said before would tell us whether it’s the production or inflation or is it both of these that is increasing the level of GDP.