What is the difference between current dollars and constant dollars?
While the Current Dollar or Nominal GDP does not account for
changes in the rate of inflation from one period to another,
knowing the figure can still be helpful in a couple of ways. First,
the Current Dollar calculation represents the market value of goods
and services that are produced in the economic period under
consideration. In other words, the figure represents the reality of
the worth of the goods at the time they were produced. Knowing this
figure is helpful in understanding exactly what was happening
within a given economy at that point in time. Often, this
information can help explain economic trends that emerged in later
periods and why they took place.
Another benefit of knowing Current Dollar GDP is that it forms
the basis for comparing the actual or real amount of growth that
took place between two different economic periods. By dividing
Current Dollar GDP by what is known as the GDP deflator, it is
possible to allow for changes in the rate of inflation between two
different years. Doing so allows comparisons of the Gross Domestic
Product of two different periods in terms that truly demonstrate
the relative value of goods and services between the two periods.
It also helps show whether there was truly any growth in the
economy.
For example, assume the most recently completed economic period
is identified as Year A, while the previous economic period is
known as Year B. If the nominal, or Current Dollar, GDP for Year A
is $100B in United States dollars and the GDP deflator is 5%, this
makes the Real GDP for Year A $95.24B USD. If the Current GDP for
Year B came to $92B USD, then true economic growth occurred.
However, if Year B had a nominal, or Current, GDP of $96B USD, this
formula will reveal that the economy declined, even though there
was an increase in Current Dollar GDP from Year B to Year A.