What is the primary difference between nominal and real GDP?

The primary difference between nominal and real GDP lies in how they account for inflation. Nominal GDP measures the value of all finished goods and services produced within a country's borders in a specific time period using current prices, without adjusting for any changes in the price level. Consequently, nominal GDP can increase simply due to inflation, masking the actual growth in economic output.

In contrast, real GDP adjusts for inflation and provides a clearer picture of an economy's true growth by expressing output in constant prices. This adjustment allows for a more accurate comparison of economic output over time, effectively highlighting the actual increase in goods and services produced, rather than reflecting changes in price levels.

As such, recognizing that nominal GDP does not consider inflation adjustments highlights that it may not accurately represent the economic health or output growth of an economy when inflation is taken into account. Understanding this distinction is crucial for analyzing economic performance and making informed decisions.