Real and Nominal GDP
We have seen the GDP aggregates, gross and net investment, Methods of GDP calculation and now we will learn about real GDP and nominal GDP. Which is considered to be a better measure of GDP calculation? Let’s find out more.
Real GDP or GDP at base year price or GDP at the constant price are all the same.
When the GDP of a given year is estimated at the price of the base year, it is called Real GDP. This is called real GDP because it takes inflation into account, that is, Real GDP shows the real picture after adjusting the inflation.
By inflation, we mean a rise in the prices of goods and services.
Nominal GDP or GDP at current year prices are the same. When the GDP of a given year is estimated on the basis of the price of the same year, it is called nominal GDP.
Which is a better measure of economic well being? Why?
Real GDP is considered to be better because of the following reasons:
- Real GDP helps in determining the effect of increased production of goods and services as it is affected by a change in physical output. On the other hand, nominal GDP can increase even without any increase in physical output but due to a change in prices.
- Real GDP is a better measure to make a periodic comparison in physical output over different years.
- Real GDP facilitates international comparison of economic performance across the countries.
- Real GDP reflects the growth of an economy.
What is GDP Deflator?
GDP deflator is also known as the price index.
GDP deflator means the average level of price of all the goods and services that makes up GDP.
GDP Deflator = Nominal GDP x 100/ Real GDP
Question 1. If real GDP is $200 and price index (with base 100) is 110. Calculate Nominal GDP.
Solution. Real GDP = Nominal GDP X 100/ Price Index
200 = Nominal GDP x 100/ 110
Nominal GDP = 200 x 110/ 100
Nominal GDP = $220
Question 2. If the Real GDP is $400 AND Nominal GDP is $450. Calculate the price index (base is 100).
Solution. Price = 112.56
Question. If the nominal GDP = 4400 and the price index (base is 100) = 100. Calculate the Real GDP.
Question. Find nominal GDP if real GDP is 100 and price index is 110.
Solve it and share your answers with me at Contact@LearnWithAnjali.com
Thanks for reading.
Feel free to join my Facebook group meant for economics students, and you can also subscribe to us.