What is the main difference between nominal GDP and real GDP?

The key distinction between nominal GDP and real GDP lies in how these measurements account for inflation. Nominal GDP calculates the value of all goods and services produced in an economy using current prices, reflecting the market conditions at the time of measurement. This means that if prices increase or inflation occurs, nominal GDP can show growth even if the actual quantity of goods and services produced has not increased.

On the other hand, real GDP adjusts for inflation by using constant prices from a base year to provide a more accurate reflection of an economy's true growth over time. This adjustment allows economists and policymakers to determine whether an increase in GDP is due to actual growth in production or merely a result of rising prices.

By accounting for inflation, real GDP offers a clearer perspective on economic health and performance, allowing comparisons over different time periods. This understanding is critical for effective economic analysis and policymaking.