When should we use real GDP numbers and when is nominal GDP used?

One uses the nominal GDP figures to determine the total value of the products and services manufactured in a country during a particular year. However, when one wants to compare GDP in one year with past years to study trends in economic growth, real GDP is used.

By definition (since real GDP is calculated using prices of a given "base year"), real GDP has no meaning by itself unless it is compared to GDP of a different year.

If a set of real GDPs from various years are calculated, each calculation uses the quantities from its own year, but all use the prices from the same base year. The differences in those real GDPs will, therefore, reflect merely differences in volume.

An index called the GDP deflator can be obtained by dividing, for each year, the nominal GDP by the real GDP. It gives an indication of the overall level of inflation or deflation in the economy.

GDP deflator for year t = GDPt / Real GDPt

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