If my paycheck went up 5% but everything costs 8% more, am I actually poorer?
Background
Nominal GDP rose from roughly $10 trillion in 2000 to over $27 trillion in 2023. Real GDP over the same period grew far less -- because a substantial share of the nominal increase was pure price-level change, not additional output. Missing this distinction inflates apparent growth and distorts comparisons across time and across countries.
The real-nominal split runs through every corner of macroeconomics: real wages versus nominal wages, real interest rates versus nominal interest rates, real exchange rates versus nominal exchange rates. The mechanism is always the same -- divide by a price index -- but the right index depends on the question.
What it covers
Every macroeconomic quantity can be expressed in two ways. The nominal version uses the prices prevailing at the time of measurement. The real version holds prices constant at some base period, so changes reflect actual movements in quantities rather than price-level drift.
The conversion is mechanical: divide the nominal value by a price index and multiply by 100. But the choice of index matters. The GDP deflator covers all domestically produced goods. The CPI covers a fixed consumption basket. They diverge -- sometimes sharply -- because the composition of production and consumption differ, and because the deflator updates its basket while the CPI historically did not.
Open question
When a number goes up, is the economy producing more -- or are prices just higher?