Nominal GDP Against Real GDP And Per Capital Real GDP

Nominal GDP vs Real GDP

Why do we have to do this distinction between nominal and real GDP? The answer is that real GDP is much more accurate metric in terms of measuring a country’s material wellbeing than that of nominal GDP (NGDP) because real GDP (RGDP) is adjusted for inflation or deflation.


In other words, real GDP refers to domestic production of final goods and services valued at constant prices whereas nominal GDP means domestic production of final goods and services valued at current prices. 


Nominal GDP Example:

Imagine an economy that produces only two types of dates, Ajwa and Anbara dates, nothing else.

Let’s call this country Dateland. And assume that Dateland uses Saudi Riyal (SAR) as its currency. Dateland Statistical Agency (DSA) publishes the historical data for production and prices shown in Table 1:

Year Price of Ajwa (per kilogram) Quantity of Ajwa dates (In kilograms) Price of Anbara (per kilogram) Quantity of Anbara dates
(In kilograms)
2019 8 SAR 900 3 SAR 3 SAR
2020 4 SAR 1,200 5 SAR 1,100
2021 6 SAR 1,000 5 SAR 1500

From the data in Table 1 we can easily calculate nominal GDP of Dateland at a given year by
multiplying the market price of each type of date with its quantity and then adding them together shown in Table 2:

Table 2

Year Calculation Nominal GDP
2019 8 SAR x 900 kg Ajwa dates + 3 SAR x 1,200 kg Anbara dates = SAR 10,800
2020 4 SAR x 1,200 kg Ajwa dates + 5 SAR x 1,100 kg Anbara dates = SAR 10,300
2021 6 SAR x 1,000 kg Ajwa dates + 5 SAR x 1,500 kg Anbara dates = SAR 13,500

Real GDP

To calculate the real GDP, we need to choose a base year. 

The base year should be a representative year in that the country in that year must not experience any abnormal occurrences such as famines, floods, devastating earthquakes, disruptive political upheavals, major economic downturns and so on – no calamity year is the base year.

Let’s assume that 2020 is one of those representative years in Dateland’s short economic history. Hence, we take 2020 as the base year for Dateland. Now using 2020 prices of Ajwa and Anbara dates, we can calculate real GDP of Dateland for the years 2019, 2020, and 2021 as shown in Table 3.

Year     Calculation     Real GDP
2019 4 SAR x 900 kg Ajwa dates + 5 SAR x 1,200 kg Anbara dates SAR 9,600
2020 4 SAR x 1,200 kg Ajwa dates + 5 SAR x 1,100 kg Anbara dates SAR 10,300
2021 4 SAR x 1,000 kg Ajwa dates + 5 SAR x 1,500 kg Anbara dates  SAR 11,500  
It is not a surprise that in 2020, which is the base year, the nominal GDP of Dateland is equal to its real GDP.

Lesson learned – the base year’s real GDP is always equal to its nominal GDP. Furthermore, in nominal terms 2019 seems a better year than that of 2020 (NGDP of SAR 10,800 in 2019 versus NGDP of SAR 10,300 in 2020) but not in real terms (RGDP of SAR 9,600 in 2019 versus RGDP of SAR 10,300 in 2020).

A very high market price of Ajwa dates has inflated 2019 nominal GDP relative to 2020.

If we assume that people’s material wellbeing is the only factor that makes them happy (a very strong assumption!), then we can argue that in 2020 Dateland people were much happier than 2020 because the real GDP of the country in 2020 was higher than that of 2019.

However, among these three years, the happiest year for Dateland citizens was 2021 because in that year Dateland generated the highest real GDP (Table 3). 

However, we should still be very watchful about media’s use of the word GDP because usually it is impossible to distinguish whether the author means real or nominal GDP.

GDP Deflator

One of the ways for capturing inflating (or deflating) effects of prices on GDP is to calculate GDP deflator for each year

using the following formula:

GDP Deflator = Nominal GDPReal GDP × 100

GDP deflator is a metric of the average (or aggregate or general) price level calculated as the ratio of nominal GDP to real GDP multiplied by 100.


Let’s apply GDP deflator formula to find Dateland’s GDP deflator series for the period 2020-2022. 

Year Nominal GDP Real GDP GDP Deflator
2019 SAR 10,800 SAR 9,600 10,800 SAR9,600 SAR × 100 = 112.5
2020 SAR 10,300 SAR  10,300 10,300 SAR10,300 SAR × 100 = 100
2021  SAR 13,500   SAR 11,500   13,500 SAR13,500 SAR × 100 = 117.4

As we see from Table 4