Nominal and Real GDP Essay Example | Topics and Well Written Essays - 500 words

Nominal and Real GDP - Essay Example 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.