# Nominal Gross Domestic Product: Definition and Formula

> **Definition**
>
> Nominal GDP is the total value of goods and services produced in an economy without accounting for inflation.

## What Is Nominal Gross Domestic Product (GDP)?

Nominal [gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp) is everything that a country produces during a certain period at current prices. This means it's not adjusted for inflation or deflation. Nominal GDP is usually measured at quarterly or annual intervals in the currency of the local economy. Nominal GDP has a direct relationship with prices, so when prices go up, nominal GDP follows. This economic metric is different from real GDP, which is adjusted for inflation.

### Key Takeaways

*   Nominal GDP is the monetary value of a country's goods and services at current market prices.
*   It doesn't remove the pace of rising prices when comparing one period to another but can inflate the growth figure.
*   Growing nominal GDP from year to year may reflect a rise in prices as opposed to growth in the number of goods and services produced.
*   Real GDP starts with nominal GDP but factors in price change between periods.

![Nominal GDP](https://www.investopedia.com/thmb/WOZCaiu1aPWS6JU83EfILaecLSQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/nominalgdp-final-8bcecab4627641b283537ba312411375.png)

*— Investopedia / Lara Antal*

## Understanding Nominal GDP

The [economy](https://www.investopedia.com/terms/e/economy.asp) is a series of interrelated processes that determine how resources are allocated. These processes include the production, distribution, and consumption of goods and services, along with other activities. These goods and services are required by those living within the economy.

There are many ways to determine and measure how well the economy is doing. Economists watch various economic indicators, such as unemployment, [inflation](https://www.investopedia.com/terms/i/inflation.asp), retail sales, industrial production, and gross domestic product. GDP is a metric that measures the health and well-being of a nation's economy. It's the total [value](https://www.investopedia.com/terms/v/value.asp) of all goods and services that are produced during a certain period less the value of those that are employed during the production process.

There are different types of GDP, including real, actual, potential, and nominal. Nominal GDP is an assessment of economic [production](https://www.investopedia.com/terms/f/factors-production.asp) in an economy that includes current prices in its calculation. In other words, it doesn't strip out inflation or the pace of rising prices, which can inflate the growth figure. All goods and services counted in nominal GDP are valued at the prices that are actually sold that year.  

> **Fast Fact**
>
> The Bureau of Economic Analysis (BEA) measures and reports GDP figures in the United States.

## Nominal GDP Formula

Nominal GDP is the total value of goods and services produced within a specific economy. There are a couple of ways to calculate it.

The first is the [expenditure approach](https://www.investopedia.com/ask/answers/070615/how-do-you-calculate-gdp-expenditures-approach.asp). To use this method, you'll have to know a few values, including:

*   [Consumer Spending](https://www.investopedia.com/terms/c/consumer-spending.asp) (C)
*   Business [Investment](https://www.investopedia.com/terms/i/investment.asp) (I)
*   Government Spending (G)
*   Total Net Exports (X-M): This figure is derived by subtracting [import](https://www.investopedia.com/terms/i/import.asp) expenditures from the total value gained from a country's [exports](https://www.investopedia.com/terms/e/export.asp).

Once you have these figures, you can plug them into the following formula:

> Nominal GDP = C + I + G + (X-M)

You can also use the [GDP price deflator](https://www.investopedia.com/terms/g/gdppricedeflator.asp) method to calculate nominal GDP. This approach involves the use of the following formula:

> Nominal GDP = Real GDP x GDP Price Deflator

Economists use the prices of goods from a [base year](https://www.investopedia.com/terms/b/base-year.asp) as a reference point when comparing GDP from one year to another. This price difference is called the GDP price deflator.  

## Components of Nominal GDP

Let's dive into the four main components of nominal GDP: consumption, investment, government spending, and net imports.

### Consumption

Consumption represents the total expenditure by households on goods and services. This includes everything from groceries and clothing to healthcare services and entertainment. It's the demand side of the economy, and consumer spending patterns can be influenced by things like [disposable income](https://www.investopedia.com/terms/d/disposableincome.asp) and cultural trends.

### Investment

Investment encompasses spending on [capital goods](https://www.investopedia.com/ask/answers/032515/what-difference-between-capital-good-and-consumer-good.asp), such as machinery, equipment, and infrastructure. When a country spends on investment, it has the aim of increasing future production capacity. Investment also includes expenditures on [research and development (R&D)](https://www.investopedia.com/terms/r/randd.asp).

### Government Spending

This refers to the expenditure by governments on goods and services. This can range from public education and healthcare to defense and [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp) projects. While government spending contributes directly to nominal GDP, its impact on the economy can vary depending on the nature of the expenditure.

For instance, investments in education and infrastructure can boost productivity, while excessive spending on [subsidies](https://www.investopedia.com/terms/s/subsidy.asp) or bureaucracy may lead to economic inefficiencies (if innovators no longer have incentives to innovate).  

### Net Imports

The final component is the difference between a country's exports and imports or its net imports. When exports exceed imports, a country has a [trade surplus](https://www.investopedia.com/terms/t/trade-surplus.asp). Conversely, when imports exceed exports, it has a [trade deficit](https://www.investopedia.com/terms/t/trade_deficit.asp). Net exports reflect a country's competitiveness in international markets and how well a country may leverage global markets for expansion.

## Effects of Inflation on Nominal GDP

Because it is measured in [current prices](https://www.investopedia.com/terms/c/currentprice.asp), growing nominal GDP from year to year might reflect a rise in prices as opposed to growth in the number of goods and services produced. If all prices rise more or less together, then this will make nominal GDP appear greater. Inflation is a negative force for economic participants because it diminishes the [purchasing power](https://www.investopedia.com/terms/p/purchasingpower.asp) of income and savings, both for consumers and investors.

Inflation is most commonly measured using the [Consumer Price Index (CPI)](https://www.investopedia.com/terms/c/consumerpriceindex.asp) or the [Producer Price Index (PPI)](https://www.investopedia.com/terms/p/ppi.asp). The CPI measures price changes from the buyer's perspective or how they impact the consumer. The PPI, on the other hand, measures the average change in selling prices that are paid to producers in the economy.

When the overall price level of the economy rises, consumers have to spend more to purchase the same amount of goods. If an individual’s income rises by 10% in a given period but inflation rises by 10% as well, then the individual’s [real income](https://www.investopedia.com/terms/r/realincome.asp) (or purchasing power) is unchanged. The term real in real income merely reflects the income after inflation has been subtracted from the figure.

> **Important**
>
> The U.S. is the world's largest economy, followed by China and Germany.

## How Nominal GDP Is Used

Nominal GDP is incredibly useful in economic analysis. It serves as a fundamental measure of economic growth, allowing policymakers, businesses, and investors to track changes in the size and direction of the economy over time.

*   Governments and [central banks](https://www.investopedia.com/terms/c/centralbank.asp) use nominal GDP data to formulate and evaluate economic policies. Policymakers theoretically make more informed decisions regarding fiscal and monetary measures by analyzing nominal GDP activity.
*   [Nominal GDP per capita](https://www.investopedia.com/terms/p/per-capita-gdp.asp), which divides total GDP by the population, offers insights into the average income and purchasing power of individuals within a country. While it does not capture income distribution or disparities, it provides a broad measure of overall prosperity and living standards. A government can compare nominal GDP per capita over time to better understand the average economic well-being of its citizens.
*   It can be used as a comparison tool for economic performance across countries. Analysts can assess relative economic size, [productivity](https://www.investopedia.com/terms/p/productivity.asp) levels, and competitiveness across countries. They can then leverage other metrics driven by nominal GDP (like nominal GDP per capita) to compare trends and changes across countries over time.
*   Businesses can use nominal GDP data to inform [strategic planning](https://www.investopedia.com/financial-edge/0612/the-importance-of-strategic-planning.aspx), market analysis, and investment decisions. Understanding broader economic trends enables companies to anticipate changes in consumer [demand](https://www.investopedia.com/terms/d/demand.asp), adjust pricing strategies, and identify growth opportunities. For instance, companies like Omnicom Group have referenced nominal GDP as part of their [Form 10-K](https://www.investopedia.com/articles/fundamental-analysis/09/form-10k.asp) annual filing.  
    

## Limitations of Nominal GDP

There are several limitations to using nominal GDP as an economic indicator. There are several factors that aren't included in nominal GDP, such as:

*   The total cost of production. While certain costs can be measured, nominal GDP doesn't include external costs that are important to the production process, such as waste and environmental factors.
*   The production and sale of goods. When it comes to production, nominal GDP only takes final production into account rather than the steps and parts used during the [manufacturing](https://www.investopedia.com/terms/m/manufacturing.asp) process. Similarly, this indicator also tracks [inventory](https://www.investopedia.com/terms/i/inventory.asp)—not the actual sale of goods.
*   Certain services. Nominal GDP doesn't include valuable services that contribute to society and the economy as a whole because they can't be quantified. These include unpaid [internships](https://www.investopedia.com/articles/younginvestors/08/land-that-internship.asp) and volunteer work.

Another limitation arises when an economy is mired in a [recession](https://www.investopedia.com/terms/r/recession.asp) or a period of negative GDP growth. Negative nominal GDP growth could be due to a decrease in prices, called [deflation](https://www.investopedia.com/terms/d/deflation.asp). If prices declined at a greater rate than production growth, nominal GDP might reflect an overall negative [growth rate](https://www.investopedia.com/terms/g/growthrates.asp) in the economy. A negative nominal GDP would be signaling a recession when, in reality, production growth was positive.   

## Nominal GDP vs. Real GDP

A nation's nominal GDP growth might overstate its [growth](https://www.investopedia.com/terms/e/economicgrowth.asp) if inflation is present when we compare GDP growth between two periods using the GDP price deflator. If prices rose by 1% since the base year, the GDP deflator would be 1.01. Overall, real GDP is a better measure any time the comparison is over multiple years. That's why economists prefer to use [real GDP over nominal GDP](https://www.investopedia.com/ask/answers/030515/real-gdp-better-index-economic-performance-gdp.asp).  

Real GDP starts with nominal GDP but it also factors in price changes from one period to another. Real GDP takes the total output for GDP and divides it by the GDP deflator. Let's say the current year's nominal GDP output was $2,000,000 while the GDP deflator showed a 1% increase in prices since the base year. Real GDP would be calculated as $2 million ÷ 1.01 or $1.98 million for the year.  

## What Are the Key Features of Nominal GDP?

Nominal GDP represents the value of all the goods and services produced within a country at current market prices. This means that it is unadjusted for inflation, so it follows any changes within the economy over time. This allows economists and analysts to track short-term changes or compare the economies of different nations or see how changes in nominal GDP can be influenced by inflation or population growth.  

## What Is the Formula for Nominal GDP?

The most common formula for nominal GDP is C + I + G + (X-M) which factors in consumer spending (C), business investment (I), government spending (G), and total net imports (X-M). GDP can also be calculated by multiplying real GDP by a GDP price deflator.

## How Do I Calculate Nominal GDP?

Nominal GDP measures the economic production in an economy and includes the current prices of goods and services in its calculation. There are different ways to calculate nominal GDP:

*   The expenditure approach accounts for the changes in quantity and the current market prices and it's a suitable way to measure nominal GDP.
*   The GDP deflator approach uses the real GDP level and the change in price in its calculation. When multiplying both elements, the result is the nominal GDP.

## Why Is Nominal GDP Higher Than Real GDP?

Nominal GDP is higher than real GDP because it takes current market prices into consideration. Conversely, real GDP is lower than nominal GDP because it takes market price changes into consideration.

## What Is the Difference Between Nominal and Real GDP?

In short, nominal GDP measures the economic production at current market prices, whereas real GDP measures the economic production factoring in any prices changes in the market (deflation or inflation).

## The Bottom Line

Nominal gross domestic product is a useful measure when GDP needs to be compared to any other factor that, like nominal GDP, is not inflation-adjusted. For example, a comparison of a nation's debt to its GDP will use nominal GDP. Keep in mind that debt is always measured in current dollars. Economists, however, favor real GDP is often over nominal GDP as it accounts for the effects of inflation.

> **Article Sources**
>
> 1.  U.S. Bureau of Labor Statistics. "[Consumer Price Index](https://www.bls.gov/cpi/)."
>     
> 2.  U.S. Bureau of Labor Statistics. "[Producer Price Indexes](https://www.bls.gov/ppi/)."
>     
> 3.  International Monetary Fund. "[GDP, Current Prices](https://www.imf.org/external/datamapper/NGDPD@WEO/OEMDC/ADVEC/WEO/JPN/FRA)."
>     
> 4.  Securities and Exchange Commission. "[Form 10-K (Omnicom Group Inc.)](https://www.sec.gov/Archives/edgar/data/29989/000002998923000005/omc-20221231.htm)," Page 12.