💰 Nominal GDP
The value of output at the prices of the year it was produced. It is not adjusted for price rises, so it can go up just because prices went up, even if the country made the same amount.
Economic Growth » Economic Growth and Real GDP
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 4.5.1, 4.5.2
- What economic growth is and how it is defined
- What GDP is, and the difference between nominal and real GDP
- Why real GDP is used to measure economic growth
- How to calculate a growth rate from real GDP figures
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Unlock This CourseWhat is economic growth?
Every country wants to be able to produce more. More output can mean more jobs, more goods in the shops and more money for hospitals and schools. Economists have a precise way of saying this.
Key terms:
- Economic growth: an increase in real GDP.
- Gross Domestic Product (GDP): the total value of all the goods and services produced in a country in a period of time, usually a year.
Remember, an outward shift of the PPC shows growth as a diagram. In this lesson we look at how growth is actually measured, with numbers.
Measuring growth with GDP
GDP adds up the value of everything a country produces: the bread, the haircuts, the phones, the bus journeys. It is measured in money, for example $300 billion in a year. Because it is "domestic", it counts what is produced inside the country's borders.
To find out whether a country has grown, we compare its GDP in one year with its GDP in the year before. But there is a trap, and it is the reason the spec says real GDP.
Nominal GDP and real GDP
📈 Real GDP
GDP adjusted for price rises (inflation), so it shows the change in the actual amount of goods and services produced. This is the figure used to measure economic growth.
Key terms:
- Nominal GDP: GDP measured at current prices, with no adjustment for inflation.
- Real GDP: GDP adjusted for inflation, so that only changes in output are shown.
Here is why it matters. Imagine a country that makes exactly the same goods in two years, but every price rises by 10%. Its nominal GDP rises by 10%, yet nobody has more to enjoy. Its real GDP has not changed, so there has been no economic growth. How inflation itself is measured comes in the lesson on Inflation, Deflation and the CPI.
Worked example: nominal to real
The made-up country of Veldoria has a nominal GDP of $200 billion in Year 1 and $220 billion in Year 2. Prices rose by 10% between the two years.
To remove the price rise, divide Year 2 nominal GDP by 1.10: $220 billion ÷ 1.10 = $200 billion. Real GDP in Year 2 (in Year 1 prices) is $200 billion, the same as Year 1. Nominal GDP rose by 10%, but there was no economic growth.
Calculating the growth rate
The economic growth rate is the percentage change in real GDP from one period to the next.
Formula
Growth rate (%) = (change in real GDP ÷ original real GDP) × 100
Follow these steps:
- Work out the change: new real GDP minus original real GDP.
- Divide the change by the original real GDP.
- Multiply by 100 and add the % sign.
Worked example: growth rate
Tarnoa has a real GDP of $400 billion in Year 1 and $416 billion in Year 2.
Change = $416 billion − $400 billion = $16 billion.
Growth rate = ($16 billion ÷ $400 billion) × 100 = 4%.
Worked example: starting from nominal GDP
Belmora has a nominal GDP of $200 billion in Year 1 and $231 billion in Year 2. Prices rose by 5%.
Real GDP in Year 2 = $231 billion ÷ 1.05 = $220 billion.
Growth rate = ($20 billion ÷ $200 billion) × 100 = 10%.
Notice that nominal GDP rose by 15.5%, but real growth was only 10%.
If real GDP falls, the answer is a negative growth rate. For example, a fall from $500 billion to $490 billion is a change of −$10 billion, which is −2%.
Comparing the two measures
| Question | Nominal GDP | Real GDP |
|---|---|---|
| Adjusted for price rises? | No | Yes |
| Can rise when output is unchanged? | Yes, if prices rise | No |
| Used to measure economic growth? | No | Yes |
Common mistakes
1. Using nominal GDP to say a country has grown. Always check whether the figures are real. 2. Dividing the change by the new GDP instead of the original. 3. Forgetting to multiply by 100, or leaving off the % sign. 4. Saying GDP is the same as the number of people or the amount of money a country has. It is the value of output.
Exam-style question
Torvania's real GDP was $250 billion in 2025 and $262.5 billion in 2026. Over the same period its nominal GDP rose from $250 billion to $275 billion.
(a) Define economic growth. [2 marks]
(b) Calculate Torvania's economic growth rate between 2025 and 2026. [2 marks]
(c) Explain why real GDP is a better measure of economic growth than nominal GDP. [4 marks]
Model answer
(a) Economic growth is an increase (1) in real GDP, the output of goods and services adjusted for price changes (1).
(b) Change = $262.5 billion − $250 billion = $12.5 billion (1). Growth rate = ($12.5 billion ÷ $250 billion) × 100 = 5% (1).
(c) Nominal GDP is measured at current prices (1), so it can rise just because prices have risen (1), even if no more is produced. Real GDP is adjusted for price rises (1), so it shows the true change in output. In Torvania nominal GDP rose by 10% but real GDP rose by only 5%, so part of the rise in nominal GDP came from higher prices (1).
Exam tip
In a "Calculate" question, show the change first, then the division. Method marks are often given even if the final answer slips.