Real and Nominal Values
It is crucial to distinguish between values measured in real terms and those in nominal terms. Nominal values measure the actual money value of output, expenditure or income. Real values, on the other hand, are concerned with the volume, the physical output, of goods produced or bought or which can be purchased with a given money income.
• Nominal GDP is the value of output measured in terms of the current prices ruling in the particular period. A change in nominal GDP can therefore result either from a change in the volume of output or the level of current prices or both. Moreover, it is not possible to differentiate between the two reasons.
• Real GDP is the value of output measured in terms of the constant prices of some chosen base period. Since the price level remains fixed by definition any change in real GDP can only arise from a change in the volume of output. So we use real GDP to look at movements in the overall level of economic activity.