Nominal vs. Real GPD

Gross domestic product (GDP) : the dollar value of all officially recognized final goods and services produced within the borders of a country in a given period.

Problems

• Dollar values change because of inflation / deflation.  
• Makes year to year comparisons difficult.

Nominal GDP is in current dollars, not adjusted for inflation. 

Real GDP is adjusted for inflation in terms of a base year.

GDP Deflator

• The broad measure of price levels in an economy. 
• Index number. Shows the changes since a base year.
• Base year is always 100
• So a GDP Deflator of 130 tells us prices have increased 30% since the base year.
• A GDP Deflator of 80 tells us prices have decreased by 20% since the base year.