What is nominal gross domestic product?

The nominal gross domestic product evaluates the production of goods and services that were produced within a period and within a country at the currently valid market prices. The total value is made up of the amount of goods and services produced as well as their prices.

In this lesson we introduce you to the nominal gross domestic product, show you its relevance and the limits of its informative value. Finally, we offer you a few practice questions to consolidate what you have learned.

What is the significance of the nominal gross domestic product?

According to sciencedict, the gross domestic product is the most important key figure within the national accounts. Here it is important to be able to differentiate between nominal and real gross domestic product. The nominal gross domestic product takes an assessment of the goods and services produced at prevailing market prices before and is therefore to analyze the current economic performance of an economy.

Gross domestic product in Germany

Nominal and real GDP

The value of the end products, which usually flow into the gross domestic product, depends both on the quantity of the products and on their prices. As a result, an increase in nominal GDP may be due to one or both factors at the same time. After all, prices increase the value of products. For this very reason, there is also the real gross domestic product in addition to the nominal.

Nominal and real gross domestic product

With real GDP, the focus is on comparing individual periods. To do this, however, it is necessary that the price is eliminated as a value-determining factor. To achieve this, a base year is selected, the prices of which then serve as a reference for all further calculations. This results in the price-adjusted real GDP, which only depends on the quantity of goods. As a result, nominal GDP can be significantly higher than real GDP, because if production remained the same, only prices rose.

nominal gross domestic product

This can be seen well with inflation and deflation. In times when prices are rising due to inflation, nominal GDP rises faster. If, on the other hand, deflation prevails and prices fall as a result, the effect is exactly the opposite: with falling market prices, nominal gross domestic product also falls. Assuming constant production, real GDP remains the same in both cases.

Calculation of the nominal gross domestic product

There are three calculation methods available for calculating nominal GDP, depending on the starting point in the economic cycle:

  • Production calculation
  • Usage calculation
  • Distribution calculation

The production calculation determines the nominal GDP from the perspective of production. In the usage calculation, the demand forms the basis of the calculation and the distribution calculation is based on the national income.


About the author