What is the difference between GDP at curren prices (money GDP) and GDP at constant prices (real GDP)?

Question

Does it make any difference which of the two is used to measure economic activity? Why or why not?

Answer 1

Constant price GDP takes into account the changing value of money, in particular it takes into account inflation. A rising current dollar GDP can simply be a result of inflation and not a real expansion of the economy.

Answer 2

Think about it this way. Let's say you're earning $10 per hour today. That's called NOMINAL dollars, meaning the value is in current dollars. But back in the 1980's, it might have only been the equivalent of $8.75 per hour.

In order to effectively compare multiple time periods to one another, you need some "basis for comparison." That's where REAL dollars come into play. It adjusts for things like inflation to provide a basic to compare.

So real GDP would be the one best used to compare the GDP of one year to another, because the playingfield has been leveled. But using nominal GDP would only give you the actual values in each of those years, without adjusting for things like inflation.

So nominal GDP is the same as unadjusted GDP, while real GDP is adjusted GDP.