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Question
Answer the following question.
How is Real Gross Domestic Product (GDP) different from Nominal Gross Domestic Product (GDP)? Explain using a numerical example.
Solution
The difference between Real Gross Domestic Product and Nominal Gross Domestic Product is given as follows:
| Basis | Real GDP | Nominal GDP |
| Definition | 1. Real GDP refers to the total market value of the output at the base year prices. | 1. Nominal GDP refers to the total market value of the output at the current year prices. |
| Change | 2. The value of Real GDP can change only when the volume/quantity of output changes over time. | 2. The value of Nominal GDP can change only with a change in the prices over time. |
| Index of Social Welfare | 3. It can be treated as an index of economic growth i.e. higher Real GDP implies higher economic growth. | 3. It cannot be treated as an index of economic growth i.e. higher Nominal GDP does not imply higher economic growth, in fact, it indicates inflation. |
Consider a hypothetical economy that produces only a single commodity x.
Suppose, in the year 2000, 100 units of the commodity X were produced and the current year price is Rs 10 and the base year price was Rs. 5.
| Commodity | Quantity A |
Current Year Price B |
Base Year Price C |
Nominal GDP Quantity x Current Year Prices (A x B) |
Real GDP Quantity x Base Year Prices (A x C) |
| x | 100 | 10 | 5 | 1,000 | 500 |
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