How does real GDP account for inflation?

Question

I know that nominal measures gdp for a year only and so does not account for the inflation. But then how does real gdp account for the inflation (or deflation) then?

From what i’ve understood, the gdp deflator shows the changes in prices. Such as 105 for a 5% increase since the base year. However, what about deflation? Does the 100 go down to 95 if there’s deflation?

In: 1

Answer 1

For real GDP you simply use last year’s prices. Since you use the same prices you can now know if the country produced more or less this year. Usually real GDP lesser than nominal GDP because pretty much all economies tend to have inflation. If there is deflation the real GDP will be greater than nominal GDP.

When you compare nominal GDPs of several years, you can’t say if you produce more or goods become more expensive. In case of real GDP its value shows exactly growth or decline of production/consumption.