29 May What is Nominal GDP Formula?
The nominal GDP formula measures a country’s gross domestic product (GDP) at current prices. The nominal GDP is different from real GDP, which takes inflation into account. If inflation has increased during the year, the nominal GDP will be greater than the real GDP.
What does nominal GDP formula mean?
A country’s GDP is equal to the total value of goods and services produced during the year. There are three ways of calculating a country’s nominal GDP:
- Income method – the total income earned in the form of wages, rent, profit, and interest during the year is added to arrive at the nominal GDP.
- Production method – this method uses the net production during the year to calculate GDP. Consumption during the year is subtracted from output to arrive at the nominal GDP.
- Expenditure method – the total value of the goods and services purchased during the year is added. The result is the nominal GDP figure.
It’s important to differentiate between nominal GDP and real GDP. The two would be the same if there were no price increase from year to year. But that is rarely the case. There is always a certain degree of price inflation every year. Consequently, nominal GDP usually exceeds real GDP.
Using real GDP instead of nominal GDP allows you to compare the level of output in an economy over the years. However, real GDP should not be used in every instance. For example, you must use nominal GDP when you are comparing a country’s GDP to its total debt. That’s because the debt would be stated in nominal dollars.
Example of nominal GDP formula
The following data from the Bureau of Economic Analysis of the U.S. Department of Commerce illustrate the difference between nominal GDP and real GDP for the last ten years.
|GDP in billions of current dollars (Nominal GDP)||GDP in billions of chained 2009 dollars
Note – Chained 2009 dollars refers to the dollars that are adjusted for inflation considering 2009 as the base year.
The data that have been reproduced above shows that nominal GDP is greater than real GDP in every year from 2010 onwards. That’s because of the impact of inflation.
Nominal GDP is a measure of a country’s economic output at current prices. It ignores the effect of inflation.