What distinguishes nominal GDP from real GDP?

Nominal GDP is defined as the total value of all goods and services produced in an economy within a certain time period, measured using current prices at the time of measurement. This means that it reflects the market value of goods and services without any adjustments for inflation or deflation. As a result, nominal GDP can change from year to year not only due to changes in actual output but also because of changes in price levels.

On the other hand, real GDP is adjusted to account for inflation, providing a more accurate representation of an economy's size and how it’s growing over time. By measuring productivity at constant prices, real GDP allows for comparisons across different time periods without the distortions caused by changing price levels.

Understanding this distinction is crucial in macroeconomics, as it helps economists and policymakers gauge economic performance and make informed decisions.