Should we care more about the growth of nominal GDP or real GDP?

Question

Should we care more about the growth of nominal GDP or real GDP

Answer 1

Real GDP is nominal GDP that is adjusted for inflation, thus real GDP is a more precise measure than nominal GDP.

Answer 2

The above are correct about real GDP -- however, nominal GDP is not useless information. It's the more important number when comparing GDP size and growth to the national debt -- that is, analyzing the debt:GDP ratio to see how manageable the national debt is and what the trends are.

I.e, suppose in a given year the deficit causes the national debt to increase 6%. That's not very meaningful unless you know what the nominal GDP did. If the nominal GDP grew by 7%, then the debt:GDP ratio will have shrunk, making the debt more manageable. This is true even if the nominal GDP growth results from 7% inflation and no real GDP growth at all. (Inflation is the debtor's friend: it decreases the real value of a given amount of debt).

Answer 3

We should focus on "real" GDP which filters out the impact of inflation on the numbers. "Nominal" GDP does not include the effects of inflation, and so gives a falsely inflated number versus prior periods. "Real" GDP gives a view in constant dollars of the period in which the comparison starts.

Another good way to view GDP is on a per capita basis, since even if there are no improvements in technology, productivity, etc, the GDP should go up in the long term just based on population increases feeding into the labor force.

Answer 4

William's answer pretty much says it all. I just wanted to add that since he mentioned checking out GDP per capita, you might as well familiarize yourself with Purchasing Power Parity (PPP) also.