Nominal GDP definition
/What is Nominal GDP?
Nominal GDP is a measure of a country's economic output for a calendar year, using current prices, without adjusting those prices for inflation. Thus, the measure includes the effects of both inflation and economic growth. Because there is no inflation adjustment, nominal GDP captures price changes (up or down) that are caused by inflation. The resulting figure works well for comparisons with other figures that are also not adjusted for inflation. For example, the amount of country-wide debt is not adjusted for inflation, so a country's debt total can be compared to its nominal GDP to develop a ratio of debt to gross domestic product.
GDP compiles the total dollar value of goods and services produced by a country within a measurement period, minus the cost of goods and services required in the production process.
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Nominal GDP vs. Real GDP
Nominal GDP varies from real GDP, in that real GDP measures economic output using inflation-adjusted dollars. For example, a country's nominal GDP grew 2.0% in the most recent year, but an inflation rate of 1.2% results in a real GDP growth figure of just 0.8%. Thus, real GDP provides a more accurate view of a country’s growth rate.
How to Measure Nominal GDP
Nominal GDP can be measured using three techniques, which are as follows:
Expenditure approach. This is the market value of the purchases of all goods and services.
Income approach. This is the sum of all income earned by individuals and businesses, including profits, compensation, interest, and rent.
Production approach. This is total estimated output minus intermediate consumption.
Problems with Nominal GDP
The nominal GDP figure can be misleading when considered by itself, since it could lead a user to assume that significant growth has occurred, when in fact there was simply a jump in a country’s inflation rate.