Real and nominal economic growth

Economic growth is defined as the rate of change of the Gross Domestic Product (GDP). Positive economic growth means that the value of all goods and services produced in the economy, i.e. the nominal GDP, is increasing.

The nominal GDP could increase for two reasons: 1) because production has increased and 2) because the prices at which the goods and services are sold in the marketplace have increased. That could be misleading if we are interested only in the change of production. It is possible that the nominal GDP is higher even if production is lower. That would be the case if prices have increased a lot. Then we measure inflation, not an increase in production.

To capture only the change in production, we look at the real GDP growth. For that, we calculate the value of the production in different years using the prices of only one year. In that way we "keep prices constant".

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