What distinguishes nominal GDP from real GDP?

Nominal GDP measures economic output using current prices, meaning it reflects the market value of all final goods and services produced within a country during a specific period, without adjusting for inflation. This means that if prices change due to inflation or deflation, nominal GDP will reflect those current price levels, providing a snapshot of the economy's size and productivity at that specific moment.

In contrast, real GDP is adjusted for changes in price levels, allowing for a more accurate comparison of economic output over time by removing the effects of inflation. This distinction is crucial because it enables economists and policymakers to assess whether the economy is actually growing in terms of real productivity, rather than simply reflecting rising prices.

Understanding this difference is essential for interpreting economic indicators and making informed decisions based on the health of the economy.