when the overall price level of the economy rises consumers have to spend more to purchase the same amount of goods if an individual s income rises by 10 in a given period but inflation rises by 10 as well then the individual s real income or purchasing power is unchanged the term real in real income merely reflects the income after inflation has been subtracted from the figure 
the u s is the world s largest economy followed by china and japan 3usefulness of nominal gdpnominal gdp is incredibly useful in economic analysis it serves as a fundamental measure of economic growth allowing policymakers businesses and investors to track changes in the size and direction of the economy over time governments and central banks use nominal gdp data to formulate and evaluate economic policies policymakers theoretically make more informed decisions regarding fiscal and monetary measures by analyzing nominal gdp activity for example nominal gdp per capita which divides total gdp by the population offers insights into the average income and purchasing power of individuals within a country while it does not capture income distribution or disparities it provides a broad measure of overall prosperity and living standards a government can compare nominal gdp per capita over time to better understand if the average economic well being of its citizens you can also use nominal gdp to compare economic performance across countries it allows analysts to assess relative economic size productivity levels and competitiveness across countries analysts can then leverage other metrics driven by nominal gdp like nominal gdp per capita to compare trends and changes across countries over time last businesses can use nominal gdp data to inform strategic planning market analysis and investment decisions understanding broader economic trends enables companies to anticipate changes in consumer demand adjust pricing strategies and identify growth opportunities for instance companies like omnicom group have referenced nominal gdp as part of their form 10 k annual filing 4limitations of nominal gdpthere are several limitations to using nominal gdp as an economic indicator there are several factors that aren t included in nominal gdp such as another limitation arises when an economy is mired in a recession or a period of negative gdp growth negative nominal gdp growth could be due to a decrease in prices called deflation if prices declined at a greater rate than production growth nominal gdp might reflect an overall negative growth rate in the economy a negative nominal gdp would be signaling a recession when in reality production growth was positive nominal gdp vs real gdpa nation s nominal gdp growth might overstate its growth if inflation is present when we compare gdp growth between two periods using the gdp price deflator for example if prices rose by 1 since the base year the gdp deflator would be 1 01 overall real gdp is a better measure any time the comparison is over multiple years that s why economists prefer to use real gdp over nominal gdp real gdp starts with nominal gdp but it also factors in price changes from one period to another real gdp takes the total output for gdp and divides it by the gdp deflator let s say the current year s nominal gdp output was 2 000 000 while the gdp deflator showed a 1 increase in prices since the base year real gdp would be calculated as 2 000 000 1 01 or 1 980 198 for the year 