Explain the meaning of Real Gross Domestic Product and Nominal Gross Domestic Product, using a numerical example.
Explain the meaning of Real Gross Domestic Product and Nominal Gross Domestic Product, using a numerical example.
Anurag Pathak Changed status to publish November 12, 2023
Solution:-
Real Gross Domestic Product:
It refers to money value of final goods and services produced in a country in a year, measured at price of base year.
It is a better tool to measure the economic growth as it is affected by change in physical output only.
It is generally used to compare the GDP of different years.
Real GDP = Quantity produced × Base Year Price
Nominal Gross Domestic Product:
It refers to money value of final goods and services produced in a country in a year, measured at current year prices.
It is not a good tool to measure the economic growth as it is affected by change in both price and quantity.
Nominal GDP = Quantity produced × Current Year Price
Example
Base Year – 2020
| Year | Car (units) | Price of Car (₹) | Nominal GDP | Real GDP |
| 2020 | 100 | 10 | 100 × 10 = 1,000 | 100 × 10 = 1,000 |
| 2021 | 100 | 20 | 100 × 20 = 2,000 | 100 × 10 = 1,000 |
| 2022 | 150 | 25 | 150 × 25 = 3,750 | 150 × 10 = 1,500 |
Explanation:-
From 2020 to 2021 Nominal GDP changes to ₹ 1,000 to ₹ 2,000 due to change in price from ₹ 10 to ₹ 20, But Quantity produced remains unchanged. But Real GDP remains constant as it is calculated on the basis of constant price.
From 2021 to 2022, Nominal GDP again changes to ₹ 2,000 to ₹ 3,750 due to change in price from ₹ 20 to ₹ 25, But Quantity produced remains unchanged. But Real GDP changes from ₹ 1,000 to ₹ 1,500 due to change in quantity produced from 100 units to 150 units.
The increase and decrease in production shows the real estimation of declining and growing economy.
Thus, Real GDP provides a better measure of economic well being than nominal GDP.
Anurag Pathak Changed status to publish November 12, 2023
