When does nominal GDP rise

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 respectively 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?

The gross domestic product is the most important key figure within the national accounts. It is important to be able to differentiate between nominal and real gross domestic product. The nominal gross domestic product takes one Evaluation of the goods and services produced at the current market prices and is therefore suitable for analyzing the current economic performance of an economy.

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 of these 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.

When it comes to real GDP, that's Comparison of individual periods in focus. 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.

This goes well with Inflation and deflation observe. 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:

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

Practice questions