Nominal vs Real GDP
Notes
- Nominal GDP (GDP at current prices): the value of output at the prices of the current year; it rises with both output and inflation.
- Real GDP (GDP at constant prices): the value of output at the prices of a fixed base year (in India, 2011-12); it removes the effect of price changes and so shows the actual growth in output.
GDP deflator
- GDP Deflator = (Nominal GDP / Real GDP) x 100. It measures the average change in prices of all domestically produced goods and services.
- Example: if nominal GDP is ₹200 and real GDP is ₹160, the deflator is 125, which means prices are 25% higher than in the base year.
- Real GDP growth rate is the headline measure of economic growth; nominal growth ≈ real growth + inflation (GDP deflator).
GDP deflator vs CPI
- The GDP deflator covers all domestically produced goods and services (including investment and government goods, and excluding imports); the CPI covers the consumer basket (including imported goods).
- The deflator's weights change with the current output (a Paasche index); the CPI uses fixed base-year weights (a Laspeyres index).
Nominal GDP vs GDP at PPP
- Nominal GDP at market exchange rates; PPP (Purchasing Power Parity) adjusts for differences in the cost of living. India ranks among the top three economies by PPP.
Basis | Nominal GDP | Real GDP |
|---|---|---|
Prices | Current year | Base year (constant) |
Affected by inflation | Yes | No |
Used for | Size of economy; debt and deficit ratios | Growth rate; comparison over time |
Key Points
- Nominal GDP: current prices; real GDP: constant base-year prices.
- Real GDP shows true output growth.
- GDP deflator = (Nominal / Real) x 100; measures economy-wide price changes.
- Nominal growth is about real growth plus the deflator.
- Deflator differs from CPI in coverage and weights.
MCQs
Q1. Real GDP is calculated using:
(a) Current prices
(b) Base-year prices
(c) Future prices
(d) Export prices only
Ans: (b) .
Q2. If nominal GDP is ₹300 and real GDP is ₹250, the GDP deflator is:
(a) 83.3
(b) 120
(c) 150
(d) 250
Ans: (b) . (300/250) x 100.
Q3. The GDP deflator measures:
(a) Only consumer prices
(b) Price changes across all domestically produced goods and services
(c) Wholesale prices only
(d) Import prices
Ans: (b) .