Real GDP offers a better perspective than nominal GDP when tracking economic output over a period. An economy’s nominal GDP differs from its real GDP because nominal includes inflation while real GDP doesn’t. If a country is producing less no. of products but inflation is high, still nominal GDP will show increase in economic growth which is not true. While calculating real GDP measurement is done at fixed prices, i.e. at the prices which are prevalent at some point of time in the past, known as base year price or reference price. It reflects the economic output at constant prices. Real GDP is considered as a true indicator of country’s economic growth because it exclusively considers the production and free from price changes or currency fluctuations.
GDP deflator is an economic scale that is used for calculating inflation. This shows how much a
change in the base year's GDP relies upon changes in the price level. It also known as the
;implicit price deflator”. By taking the ratio of nominal GDP to real GDP, we get a measure of
prices which is called GDP deflator. The GDP deflator helps identifying how much prices have
inflated over a specific period of time.
Nominal GDP = Real GDP * Prices
GDP deflator = Prices = Nominal GDP