A nominal gross domestic product (GDP) is a measure of the total production in a country. The word nominal refers to the units the production is measured in, namely the current currency of the country in question. By contrast, a real GDP is fundamentally measured in units of common goods instead of money—in other words, a real GDP is adjusted for inflation. Nominal GDP is typically calculated in one of three ways: the production, expenditure, or income method. A GDP figure given in nominal terms can be convenient for measuring current economic activity that uses a familiar currency.
The first way to calculate nominal GDP is the production method, which is often considered the most direct. All goods and services in a country are tallied up to give the nominal GDP figure. The second method is the expenditure method, which sums up the spending of all citizens on domestic goods and services. Lastly, the income method works by totaling everyone’s received income in a country. Though the three methods give similar figures, some complications can result from international business transactions.
Once a figure for nominal GDP is obtained, it can be left in nominal form or converted to real GDP. Real GDP is helpful in comparing economic output between two different times in history. Since inflation alters the inherent value of a given amount of money, different nominal GDP figures can describe the same level of output at different times. For example, the nominal GDP of the United States was about $521 billion US Dollars (USD) in 1960 and about $1.03 trillion USD in 1970. This does not mean that total output nearly doubled in 10 years; rather, output increased slightly and inflation accounted for the rest.
If real GDP currency figures are desired, they must be given in terms of a base year. Often, real GDP will be given in terms of a year’s currency, such as “1981 US Dollars.” This way, the figures can be used to meaningfully describe economic conditions of past eras with an intuitive currency reference. Few people are aware of how much a given unit of currency was worth several decades in the past. With real GDP figures, past economic phenomena can be described in terms of familiar currency.
Per capita GDP is a GDP figure divided by the total population of the country in question. It can be a useful, though not perfect, measure of average standards of living in a country. GDP in large part rises due to population expansion, but per capita GDP can indicate average productivity changes per worker.