1. Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or constant prices).

2. Since these prices remain fixed, if the Real GDP changes we can be sure that it is the volume of production which is undergoing changes.

Nominal GDP

Nominal GDP, is simply the value of GDP at the current prevailing prices.

Example : To simplify the concepts of Nominal and Real GDP:

Suppose a country only produces bread. In the year 2000 it had produced 100 units of bread, price was Rs 10 per bread. GDP at current price was Rs 1,000. In 2001 the same country produced 110 units of bread at price Rs 15 per bread. Therefore nominal GDP in 2001 was Rs 1,650 (=110 × Rs 15). Real GDP in 2001 calculated at the price of the year 2000 (2000 will be called the base year) will be 110 × Rs 10 = Rs 1,100.

Notice that the ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the real GDP) to the current year.