If prices rise, GDP can grow even when nothing more is made. Real GDP strips that out.
Nominal and real
Nominal GDP
Measured at current prices: it rises with inflation.
Real GDP
Measured at constant (base-year) prices: inflation removed.
The points to remember
- Real GDP = nominal GDP ÷ deflator × 100.
- Deflator = nominal GDP ÷ real GDP × 100.
- The base year has a deflator of 100.
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Plot both over time and the difference shows up as a gap.
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The points to remember
- A positive growth rate means real GDP rose, even if the rate is falling.
- Nominal growth ≈ real growth + inflation.
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To compare living standards, divide by the population, then allow for prices.
Our example (made-up numbers): comparing two countries
| Country A | Country B | |
|---|---|---|
| GDP (US$ billion) | 500 | 500 |
| Population (million) | 10 | 50 |
| GDP per capita (US$) | 50,000 | 10,000 |
| GDP per capita at PPP (US$) | 40,000 | 20,000 |
Two adjustments
Per capita
GDP ÷ population: income per person.
PPP
Purchasing power parity: adjusts for what money buys in each country.
Remember it as: Real for time, per capita for people, PPP for prices.
Paper 2 asks this almost every session: November 2023, November 2024 and May 2025, 2 + 1 marks.
Our example (made-up numbers)
| Indicator | Value |
|---|---|
| Nominal GDP (€ billion) | 1,200 |
| GDP deflator (base year = 100) | 120 |
| Population (million) | 50 |
Using the table, calculate: (i) the country's real GDP [2]; (ii) its real GDP per capita [1].
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
How the 3 marks are given
| You write | Marks |
|---|---|
| Real GDP: valid working, nominal ÷ deflator × 100 | 1 |
| Real GDP: the answer | 1 |
| Real GDP: the answer alone, no working | 1 |
| Per capita: the answer (no working needed) | 1 |