GDP does not reflect all costs The production of some goods degrades the quality of our environment. In the GDP the market price of the output is the measure of its value. Each dollar spent is counted the same. The dollars spent on buying baby food are counted the same as the dollars spent on X-rated magazines sold in bookstores. GDP is measures the value of output in current dollars.
Current dollars are the dollar value at the time the output is produced.
This is called the nominal GDP because it is based on prices prevailing at the time the output is produced. Since the economy s price level changes over time, current-dollar comparisons make little sense. If we do not adjust for the changing price level, we cannot find the true increase or decrease in aggregate output. Real GDP is GDP measured in terms of actual production. It has the impact of price changes removed.