Difference between Nominal GNP and Real GNP, What is implicit price deflator for GNP


Inflation or deflation complicates GNP because GNP is a price times-quantity figure. The changes either in the price level or the change in output produced may affect the size of GNP. Then there rises a distinction between nominal GNP and real GNP. The nominal GNP is the representation of GNP in monetary terms while the real GNP is the representation of GNP in quantity or physical terms. Broadly, the nominal or current price GNP measures the value output at the prices prevailing in the period during which the output is produced. While the real GNP or constant price GNP measures the output produced in any period at the prices of some base year. Real GNP which values the output produced in different years at the same prices implies an estimate of the real or physical change in production or output between any specified years. If we assume 2000 as a base year, it will serve as the base year for real output measurement. US nominal GNP was $4864 billion in 1988 and it was $1598 billion in 1975.

Thus nominal GNP grew at an average rate of 8.9% during the period 1975 – 1988. While if we measure the value of output produced in a year say 1990 on the prices of a given year say 1982 this will be a case of real GNP. US real GNP was $3996 billion in 1988 and $2695 billion in 1975. This shows that real grew at an average of 3.1% per year over the period. If we divide real GNP by the population of 246 million people in 1988 in the US i.e. we divide $3996 billion by 246 million population we get per capita real GNP which was $1644 per member of the population.

From the above figures, we see that in the US nominal GNP has risen much more rapidly than real GNP. The increase in nominal incomes as compared to real income is attributed to inflation. The difference in the growth rate of the nominal GNP (8.9%) and the real GNP (3.1%) represents inflation (5.8%). In other words, the nominal increase in GNP is due to price-like inflation.


From the above discussion, we come to know that the nominal, monetary, unadjusted, or current GNP reflects inflation. Therefore to assess the real GNP also some constant price level GNP will have to be deflated in the case when prices are rising. On the other hand, if the prices are falling, then to know the constant price, adjusted or real GNP will have to be inflated. The process of deflating or inflating gives us the real or constant price index of GNP. We know that the GNP deflator of a specific year tells us the ratio of that year’s prices to the prices of the same goods in the base year. GNP deflator or GNP price index therefore can be used to inflate or deflate nominal GNP figures. The outcome of this adjustment is that GNP for each year gets expressed in real terms. The method adopted for deflating or inflating a year’s nominal GNP is to express that year’s index number in decimal form and divide it into nominal GNP. It is as



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