Economic growth: GDP, GNI, real and nominal

GDP and GNI

Gross domestic product (GDP) is the total value of goods and services produced within a country's borders in a year.

Gross national income (GNI) is GDP plus income earned by the country's residents from abroad (profits, interest, dividends) minus income paid to foreign residents. For a country with many foreign-owned firms sending profits home, GNI is smaller than GDP; for a country whose residents own lots of assets abroad, GNI can be bigger.

Economic growth is the rate of change of real GDP, usually as a percentage per year, and is used as a broad indicator of changes in living standards.

Real and nominal

• Nominal (money, current price) GDP is measured at the prices of the year. It rises if prices rise even when output does not.
• Real (constant price) GDP removes the effect of inflation, so it measures changes in the volume of output.

Real GDP = nominal GDP x (100 / price index), with the price index equal to 100 in the base year.

A quick approximation: real growth ≈ nominal growth - inflation.

Total and per capita, value and volume

• Total GDP measures the size of an economy. GDP per capita = GDP / population, which is a better guide to the average standard of living.
• A value measure is in money terms (nominal). A volume measure tracks the quantity of output, which is what real GDP estimates.

If population grows faster than real GDP, real GDP per capita falls even though the economy is growing.

Worked example

Nominal GDP rises from $2100 bn to $2310 bn. The price index rises from 100 to 105. Find the real growth rate.

1. Real GDP this year in base-year prices = 2310 x 100 / 105 = 2200
2. Real growth = (2200 - 2100) / 2100 x 100 = 4.8%
3. Check with the approximation: nominal growth 10% minus inflation 5% ≈ 5%

Answer: Real GDP grew by 4.8%

Check yourself

1. Nominal GDP is $660 bn and the GDP deflator is 110 (base year = 100). Find real GDP in base-year prices, in $ bn.
   Show answer

   $600 bn. Real GDP = 660 x 100 / 110 = $600 bn.

2. Real GDP rises from $480 bn to $498 bn. Find the rate of economic growth, as a percentage.
   Show answer

   3.75 %. (498 - 480) / 480 x 100 = 3.75%.

3. Nominal GDP grows by 7% and inflation is 4%. Using the approximation, what is real GDP growth in %?
   Show answer

   3 %. Real growth ≈ nominal growth - inflation = 7 - 4 = 3%.

4. A country has real GDP of $90 bn and a population of 12 million. Find real GDP per capita in $.
   Show answer

   $7500. 90,000,000,000 / 12,000,000 = $7,500.

5. GDP is $500 bn. Residents earn $30 bn from assets abroad and $45 bn is paid to foreign owners of domestic assets. Find GNI in $ bn.
   Show answer

   $485 bn. GNI = 500 + 30 - 45 = $485 bn.

6. Real GDP grows by 2% while the population grows by 3%. What happens to real GDP per capita?
   • It rises by 2%
   • It rises by 5%
   • It is unchanged
   • It falls
   Show answer

   It falls. Output is shared among a population growing faster than output, so real GDP per capita falls by roughly 1%.

7. Which statement about nominal GDP is correct?
   • It is adjusted for inflation
   • It can rise even if the volume of output is unchanged
   • It is always lower than real GDP
   • It measures output per person
   Show answer

   It can rise even if the volume of output is unchanged. Nominal GDP is at current prices, so rising prices raise it with no extra output.

8. What is the difference between GNI and GDP?
   • Net income from abroad
   • Depreciation
   • Indirect taxes
   • Government spending
   Show answer

   Net income from abroad. GNI = GDP + income from abroad - income paid abroad.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2 (June 2018)
• Pearson qualifications: Edexcel International Advanced Level Economics (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.