What is the difference between nominal GDP and real GDP?

The distinction between nominal GDP and real GDP is crucial in understanding economic performance. Nominal GDP refers to the total value of all goods and services produced in an economy at current market prices, without accounting for changes in price levels or inflation over time. This means it reflects the actual prices that consumers pay and can fluctuate based on inflation rates.

Real GDP, on the other hand, is adjusted for inflation, providing a more accurate reflection of an economy's true growth by measuring the value of goods and services in constant prices. This adjustment allows for a comparison of economic output over time without the distortions caused by inflation or deflation, giving a clearer picture of how much the economy is actually growing.

Therefore, the answer highlights that nominal GDP reflects economic output at current prices, while real GDP represents that output with inflation taken into account, making it a better indicator of economic health and growth over time. This adjustment is significant as it allows policymakers and economists to make more informed decisions based on the actual increase in production rather than changes in price.