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Nominal GDP versus Real GDP

Author: Kate Eskra
Video Transcript
Terms to Know
GDP

Gross Domestic Product; the sum of all final goods and services sold within a nation’s domestic borders; a measurement of economic activity.

Interest Rate Effect

As interest rates fall, consumption increases due to the decrease in the cost of borrowing; as a result, purchases and business investment (consumption, C, and investment, I, respectively) both increase.

Nominal

The value of an economic variable such as GDP, inflation, or prices in the current period; does not reflect changes in purchasing power (price level) over time.

Nominal GDP

The value of GDP including the impact of inflation.

Price

The cost of a good or service; nominal prices reflect the current or prevailing price for an item; real prices adjust for purchasing power variation over time (inflation).

Real

The value of an economic variable such as GDP, inflation, or prices in the current period, adjusted for the change in purchasing power (price level) over time.

Real GDP

Adjusts for inflation by restating nominal GDP in reference to a base year dollar value.