GDP or Gross Domestic Product measures the output of goods and service produced within a country within a particular period. It can be measured in nominal terms or in volume terms. In both cases GDP is calculated by multiplying the quantity or volume of each good or service produced by its price and then aggregating all the results.
In the case of nominal GDP the prices used are those operating in the same period in which the goods or services were produced. So to calculate nominal GDP for 2010 the volumes produced in 2010 would be multiplied by the prices of the goods or services in 2010; for nominal GDP in 2011 the volumes produced in 2011 would be multiplied the prices of the goods or services in 2011; and so on. Changes in nominal GDP can therefore be due to changes in prices or changes in volumes produced, or in both.
In the case of real GDP the prices used are those operating in some base year. If the base year were 2011 then real GDP in 2011 would be the volumes produced in 2011 multiplied by the prices of the goods or services in 2011; real GDP in 2012 would be the volumes produced in 2012 multiplied by the prices of the goods or services in 2011; and so on. Changes in real GDP are therefore due solely to changes in volumes produced. (In this example real and nominal GDP would be the same in the base year, 2011.) Many real series are now presented as chained volume measures (CVM). With these the base year is updated every year: so each real series is estimated both in current prices and prices of the previous year (PYPs). The growth rates of the series in successive years on the same prices (for example, 2006 estimated in current prices and 2007 in PYPs) are linked together in a chain of short series to give a full real-terms time series. Given rapid changes in the industry and product mixes of the economy CVMs provide a more accurate picture of changes than constant price series rebased every 5 years.
If GDP is to be used as an indicator of changes in a country’s standard of living – as it commonly is, or for comparing standards of living across countries, real GDP is the appropriate measure since it is the volumes of goods and services available that determine the standard of living.
Real GDP per capita is real GDP divided by the country’s population. It provides a better measure of a country’s (average) standard of living than GDP itself since it shows the volume of goods and services available in principle to each member of the population.
Nominal GDP is more useful for assessing how ‘big’ other nominal figures are. For example, knowing that a country’s government budget deficit is 3bn pounds or dollars etc. isn’t very informative if you do not have information on the nominal size of the economy. So comparisons of things like the value of budgets deficits generally express the variable as a proportion of nominal GDP.