What distinguishes nominal GDP from real GDP?

Nominal GDP and real GDP are critical concepts in macroeconomics used to measure a country's economic performance, but they differ significantly in how they account for price changes over time. Nominal GDP measures the total value of all goods and services produced in a country at current market prices, without adjusting for inflation. This means that if prices increase due to inflation, nominal GDP can rise even if there is no actual increase in the output of goods and services.

On the other hand, real GDP adjusts for changes in the price level and reflects the true volume of production by using prices from a base year. This adjustment allows for a more accurate comparison of economic output over time, as it removes the effects of inflation or deflation.

This distinction is essential for economists and policymakers, as relying solely on nominal GDP can lead to misleading interpretations of a country's economic health. Therefore, understanding that nominal GDP does not account for inflation while real GDP does is crucial in economic analysis.