Question

Distinguish between real and nominal gross domestic product.

Answer 1

Nominal GDP or GDP at Current Prices: When GDP of a given year is estimated on the basis of prices of the same (current) year, it is called nominal GDP.

Nominal GDP can increase even without any increase in physical output as it is affected by changes in prices also.

Real GDP or GDP at Constant Prices: When GDP of a given year is estimated on the basis of prices of a base year, it is called real GDP. Real GDP helps in determining the effect of increased production of goods and services as it is affected by change in physical output only.