Definition of GDP
The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
GDP = C + G + I + NX
where:
"C" is equal to all private consumption, or consumer spending, in a nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital
"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports).
Significance
The most important measure of economic activity in a country, the Gross Domestic Product is the crossing point of three sides of the economy: expenditure, output, and income. As a measure of well-being of a country for international and temporal comparisons, it provides a good first approximation.
Nominal GDP
Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices.
Real GDP
Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year.
Real GDP is calculated using constant prices whereas nominal GDP uses current prices.[1] The difference between the nominal GDP and real GDP is due to the inflation rate in market.When comparing nominal GDP figures between different years, you cannot determine whether the increase is due to the increase in price level or increase in output. Real GDP is adjusted for price level, that is, GDP measured at the same price level.
An example: Suppose in the year 2000, the economy of a country produced $100 billion worth of goods and services based on year 2000 prices. Since we're using 2000 as a basis year, the nominal and real GDP are the same. In the year 2001, the economy produced