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Nominal GDP measures the value of economic output using the prices that exist in the period being measured. Real GDP adjusts that output for price changes so analysts can better distinguish growth in the quantity of goods and services from growth caused by inflation.
What nominal GDP measures
The Bureau of Economic Analysis uses the term current-dollar GDP for nominal GDP. These figures value production at the prices in effect during the period. If the same number of goods and services is produced but prices rise, current-dollar GDP can increase even though physical output did not.
This makes nominal GDP useful when the question involves the dollar size of the economy, current-dollar income, current tax bases, or comparisons with other current-dollar figures.
What real GDP measures
Real GDP is inflation adjusted. BEA removes the effects of changing prices so the measure can be used to compare the level and growth of production across time more meaningfully.
That is why headlines about whether the economy “grew” or “contracted” usually refer to changes in real GDP rather than current-dollar GDP.
A simple example
| Year | Units produced | Average price | Nominal value |
|---|---|---|---|
| Year 1 | 100 | $10 | $1,000 |
| Year 2 | 100 | $11 | $1,100 |
In this simplified example, nominal output rises 10% even though the number of units produced did not change. A real measure would adjust for the price increase and show that output volume was flat.
Can nominal GDP fall while real GDP rises?
Yes. BEA specifically notes that current-dollar GDP can decline while real GDP rises if the quantity of output increases slightly while prices fall enough to reduce the current-dollar value. The reverse can also happen: nominal GDP can rise while real GDP falls if price increases are large enough.
Real GDP does not mean “inflation is gone”
Inflation adjustment makes real GDP more useful for comparing output over time, but it does not mean the economy is unaffected by inflation. Price changes still influence household purchasing power, business costs, interest rates and financial decisions.
For the inflation side of the story, read Inflation Explained and CPI vs. PCE Inflation.
Why GDP growth rates are usually quoted in real terms
If analysts used only nominal GDP growth, a period of high inflation could look like strong economic expansion even when the amount of goods and services produced changed little. Real GDP helps separate those two effects.
This does not make real GDP a complete measure of well-being. It says something important about production, not everything about distribution, household finances, environmental costs or quality of life.
How to read BEA GDP releases
When reading a release, identify whether a figure is:
- current-dollar GDP or real GDP;
- a level or a growth rate;
- quarter-over-quarter or year-over-year;
- seasonally adjusted; and
- an advance, second or third estimate subject to revision.
Those details can materially change the interpretation.
Continue learning
Read What GDP Measures, GDP vs. GDI, and How the U.S. Economy Works.
Sources & methodology
This article provides general economic education. GDP estimates are revised as more complete source data become available.
EconomicHQ standard
Sources, dates, and methodology matter.
EconomicHQ prioritizes primary sources for consequential financial and economic claims and identifies reporting periods for changing information. This article is educational and does not provide individualized financial, investment, tax, legal, or credit advice.