GDP - a nominal measure or a real one ?

In his recent lecture about incorporating prices in a model, Steve made a relatively casual remark that I found distinctly insightful .He has a knack for that sort of thing, it seems. That remark detonated a specific preconception-destroying ‘bomb’ in my insufficiently understanding head.

Often, when expressed in currency terms, economic quantities are nominal. To get to real values, inflation of the price system has to be taken into account. But GDP figures are real, said Steve, which tripped up my thought processes. Now, I think I’ve seen what he meant.

GDP is really Gross Domestic Trade, measuring the flow of successful exchanges that have taken place. For a buyer and seller to decide to trade, both must be satisfied with the resultant exchange of real value. The inflated value of money is therefore already taken into account in such decisions. So GDP is a real measure, since it derives from exchange of real value not nominal value. Whoo-hoo !

Maybe that was already obvious to the rest of you folks at Skool …

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