Nominal Gross Domestic Product

Nominal GDP is GDP using current quantities and current dollars. It is calculated by multiplying the number of products by their current prices. An increase in nominal GDP does not necessarily represent an increase in production. If prices double from one year to another and production remains the same, nominal GDP will double.

Real Gross Domestic Product

Real GDP is GDP using current quantities and so-called constant dollars. It is calculated by multiplying the number of products by constant prices from a base year. For example, we can select the year 2000 as the “base year,” and calculate real GDP in other years by using prices from the year 2000. Real GDP, thus, only measures the changes in the volume of production. This is a better indicator of economic activity and economic health.

Example Problem: Let’s suppose that a very small country makes only two commodities: pizzas and smart phones. The country bakes 200 pizzas at \$10 each in year 1. In that same year, it manufactures 100 smart phones at \$50 each.

In year 2, the country makes 190 pizzas and 110 smart phones at respective prices of \$12 and \$60 each. Using year 1 as the base year for calculating real GDP, what are nominal and real GDP for each year?

The solution is given in the table below:

 Production and Prices Year 1 Nominal GDP Year 2 Nominal GDP Year 1 Real GDP Using Year 1 Prices Year 2 Real GDP Using Year 1 Prices 200 pizzas at \$10 each (year 1) \$2,000 plus \$2,000 plus 100 smart phones at \$50 each (year 1) \$5,000 equals: \$5,000 equals: \$7,000 \$7,000 190 pizzas at \$12 each (year 2) \$2,280 plus \$1,900 (190 times \$10) plus 110 smart phones at \$60 each (year 2) \$6,600 equals: \$5,500 (110 times \$50) equals: \$8,880 \$7,400

The above table shows that nominal GDP rises from \$7,000 in year 1 to \$8,880 in year 2. Real GDP also rises, but not by as much (because of the adjustment for price increases). It is \$7,000 in year 1, and rises to \$7,400 in year 2.

Video Explanation
For a video explanation of how to calculate real and nominal Gross Domestic Product, please watch the following:

The Fisher Formula

For several years now, the U.S. government has used a different way to calculate real GDP. Instead of using a certain base year for calculation of real GDP of all years, a so-called “Fisher formula” that incorporates price and quantity weights from two adjacent years or quarters, is used. These annual or quarterly changes are “chained” (multiplied) together to form time series of quantity and price indexes. For more information, click here for Bureau of Economic Analysis GDP calculations and explanations: (http://www.bea.gov). For our purposes, the idea or concept of the difference between nominal and real GDP is the same whether you use base years or chained weights.

As of 2012, the United States government also added research and development and artistic works to the GDP. This has resulted in higher numbers for GDP for this year. All previous years were also adjusted to reflect this change (see table below).

United States Nominal and Real GDP Throughout the Years

The table below shows United States Bureau of Economic Analysis selected annual nominal and real GDP data for the United States since 1930, in chained (real) dollars rounded to the nearest whole dollar amount (in billions). Both nominal and real GDP in the United States have grown considerably over the decades. Due to the housing/financial crash in 2008, real GDP fell from 2008 to 2009, but, with the exception of the first pandemic year 2020, grew every year since then.

 Year United States Nominal Gross Domestic Product in billions of current dollars (nominal GDP) United States Real Gross Domestic Product in billions of dollars 1930 92 1,015 1940 103 1,330 1950 300 2,383 1960 543 3,232 1970 1,075 4,936 1980 2,862 6,814 1990 5,979 9,313 2000 10,289 13,261 2001 10,625 13,281 2002 10,980 13,559 2003 11,512 14,146 2004 12,277 14,610 2005 13,095 15,067 2006 13,857 15,457 2007 14,480 15,761 2008 14,720 15,328 2009 14,417 15,356 2010 14,958 15,751 2011 15,533 16.004 2012 16,239 16,239 2013 16,691 16,664 2014 17,427 17,112 2015 18,120 17,456 2016 18,624 17,784 2017 19,495 18,224 2018 20,658 18,665 2019 21,452 19,121 2020 20,940 18,767 2021 23,190 19,479 2022 25,724 20,950 2023 27,645 22,506

Source: www.bea.gov.