Nominal Vs Real GDP

Nominal GDP

  • Nominal GDP is an economic metric that measures the total market value of all finished goods and services produced by a country at their current market prices in a single year.
  • It is defined as a GDP measure, expressed in absolute terms. The raw GDP data, before inflation is called Nominal GDP.
  • Nominal GDP is the aggregate monetary value of the economic output produced during a particular financial year, within the nation’s border. It represents the GDP at prevailing prices in the market, i.e. the current market price.
  • It includes all the changes in the prices of finished goods and services that took place in one year due to inflation or deflation.

Real GDP

  • Real GDP, also known as inflation-adjusted GDP, measures the value of finished goods and services at constant base-year prices. The real GDP is inflation-adjusted or deflation with the use of nominal GDP and the GDP deflator.
  • GDP deflator is a factor by which Nominal GDP is adjusted to calculate Real GDP. It adjusts gross domestic product by removing the effect of rising prices. It shows how much an economy’s GDP is really growing.
  • Formula is : GDP Deflator = ( Nominal GDP / Real GDP ) * 100
  • This includes changes in the general price level in a given year to provide an accurate picture of an economy’s growth using base-year prices. If the general price level changes from one year to the next, it is difficult to compare the amount of output across different years.
  • By valuing the entire output of an economy using the average price of a base year, economists can use this measurement to analyze an economy’s purchasing power and growth potential in the long-term.
  • Real GDP is considered as a true indicator of country’s economic growth. It exclusively considers the production and free from price changes or currency fluctuations.
  • The real GDP reflects the nominal GDP of an economy if there were no prices changes due to inflation.

In the FY 2022-23, Bangladesh's real GDP growth may decelerate to 6.5%, according to Fitch Solutions - a global rating agency, which attributes the deceleration to a variety of economic challenges. First, commodity prices have surged since the outbreak of the Russia-Ukraine war and prices are expected to stay at moderate level in 2023. Given Bangladesh's low GDP per capita, this is expected to have a major impact on discretionary consumption expenditure. In Bangladesh, inflation jumped to 6.3 percent in April'22, up from 6.2 percent in March. Taking inflation into account, the nominal GDP growth rate is about 13%. (sum of real GDP growth and inflation). The second point is that rising commodity prices are likely to hinder investment in Bangladesh. Increasing commodity prices will result in a higher import bill, weighing on savings and thus investment.