Real *** Domestic Product:** It refers to money value of final goods and services produced in a country in a year, measured at price of base year. It is a better tool for measuring the economic growth of a country. It is generally used for comparing the GDP of different years. Real GDP.= Base year Price (PO) x Current Quantity (Q1).
Nominal *** Domestic Product:** It refers to money value of final goods and services produced in a country in a year, measured at current year prices. It is not a good tool for measuring the economic growth of a country. It is affected by change in both price and quantity. It is not a suitable tool for comparing the GDP of different years.
Nominal GDP. = Current Price (P1) x Current Quantity (Q1)
For example -
From above example we learn that compared to 2015, there is no change in real GDP in 2016 and there is only 20 per cent rise in the real GDP of 2017. Because the price is held constant, real GDP varies from year to year only if the quantities produced vary and thus, real GDP provides a better measure of economic well being than nominal GDP.
