ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Nominal GDP measures output using current prices, while real GDP measures output using constant prices. We can explore how price changes can distort GDP using a visual representation of GDP.

Detailed explanation-2: -Nominal GDP reflects the raw numbers in current dollars unadjusted for inflation. Real GDP adjusts the numbers by fixing the currency value, thus eliminating any distortion caused by inflation or deflation.

Detailed explanation-3: -Real GDP takes into consideration adjustments for changes in inflation. This means that if inflation is positive, real GDP will be lower than nominal, and vice versa. Without a real GDP adjustment, positive inflation greatly inflates GDP in nominal terms.

Detailed explanation-4: -Nominal Gross Domestic Product (GDP) and Real GDP both quantify the total value of all goods produced in a country in a year. However, real GDP is adjusted for inflation, while nominal GDP isn’t.

Detailed explanation-5: -While nominal GDP by definition reflects inflation, real GDP uses a GDP deflator to adjust for inflation, thus reflecting only changes in real output. Since inflation is generally a positive number, a country’s nominal GDP is generally higher than its real GDP.