Nominal GDP and Real GDP class 12 CBSE Board

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Nominal GDP and Real GDP are the important topics of the national income chapter of Macroeconomics class 12 CBSE Board.

It is a short topic and in this lecture, we will discuss it in detail covering its all aspects.

The concept of real and nominal GDP arises with the question of whether the calculation of GDP indicates the actual welfare of the society or not.

What is Nominal GDP?

GDP (Gross Domestic Product) is the money value of all goods and services produced within the domestic territory of a country in a year.

But when money value is calculated at the current prices of an accounting year it is called Nominal GDP.

Nominal GDP with an example

Let’s suppose in 2021 there are 200 quantities of goods produced and the current price in the market is ₹ 50.

Thus the Nominal GDP of 2021 is

Nominal GDP = quantity produced * current year market price

Nominal GDP = 200 * 50 = ₹ 10,000

If the price in 2022 changes to ₹ 60

The Nominal GDP of 2022 would be

Nominal GDP (2022) = 200 * 60 = ₹ ₹ 12000

Thus Nominal GDP also refers to GDP at current prices.

Note:- Nominal GDP either quantity of goods changes or current year prices changes.

Definition of Nominal GDP

Different textbooks have given the definition of Nominal GDP. Let’s see how they differ. You can learn anyone out of them that looks easy to you.

It is the Market value of the final goods and services produced within the domestic territory of a country during an accounting year, as estimated using the current year prices.

T.R Jain

It is the money value of final goods and services produced by normal residents of a country in a year, measured at the prices of the current year.

Sandeep Garg

When the value of the final goods and services produced within the domestic territory of a country expressed in terms of current market value. It is called Nominal GDP.

S.K Aggarwal

Other Names of Nominal GDP

  1. GDP at current prices.
  2. Nominal National Income

Formula of Nominal GDP

Nominal GDP = quantity of final goods and services produced during an accounting year * Prices prevailing during the accounting year.

Nominal GDP = Q * P

Example of Nominal GDP

Let’s assume in India during 2020-21 10 chairs, 20 grocery products, and 30 Machinery are produced. The current market prices of groceries are chair ₹50 per piece, grocery ₹100 per piece, machinery ₹70 per piece.

Hence

Nominal GDP = 10 * 50 + 20 * 100 + 30 * 70 = ₹500 + ₹2000 + ₹2100 = ₹4600

What is Real GDP?

When GDP is calculated eliminating the effect of inflation it is called Real GDP. It is calculated at the price of the Base year.

It is the market value of the final goods and services produced within the domestic territory of a country during an accounting year, as estimated using the base year prices.

T.R Jain

It is the money value of final goods and services produced by normal residents of a country in a year, measured at base year price.

Sandeep Garg

Other names of Real GDP

  1. GDP at constant prices.
  2. Real National Income
  3. Real Domestic Income

Formula of Real GDP

In order to calculate Real GDP, a base year is decided that is free from price fluctuation. So far India’s base year is 2011-12. But the government would change it to 2017-18. Many economists advising 2020-21 as the base year.

Example of Real GDP

For example, there are 100 units of goods and services are produced in 2020-21. Price prevailing in the same year are Rs. 10 per unit. But the price in 2011-12 was Rs 8 per unit.

Hence Real GDP would be 100 * 8 = ₹800

Difference between Nominal GDP and Real GDP

BasisNominal GDPReal GDP
MeaningIt refers to the money value of final goods and services produced by normal residents of a country in a year, measured at the current priceIt is the money value of final goods and services produced by normal residents of a country in a year, measured at base year price.
Indicates Economic growthit is not a good indicator of economic growth It better indicates economic growth.
Causes of changeIt changes when both price and quantity change or anyone.It only changes when only quantity changes.
ComparisonIt is not a good tool to compare the domestic income of the different years.It is a good tool.
CalculationQuantity * current priceQuantity * Base year price
Alternative NameDomestic income at the current priceDomestic income at constant price.

Note:- If the difference between nominal and real national income is asked change domestic to national.

What is GDP deflator?

Define GDP deflator

It refers to the ratio between GDP at current prices and GDP at constant prices. It is expressed as under:

Formula of GDP deflator

GDP Deflator = GDP at current prices/GDP at Constant prices * 100

This formula can also be written as

With help of the GDP deflator formula. We can easily convert Nominal GDP into Real GDP, provided the price index (base year price) is given.

Further Reading:-

S.NTopics
1.What is Macroeconomics
2.What are Goods in economics
3.What are Consumption Goods
4.What are capital goods
5.What are intermediate Goods
6.What is intermediate consumption
7.What are final Goods
8.What is Final Consumption
9.What is investment in economics
10. What is stock and flow
11.What are transfer payments
12.What is circular flow of income
13.What is Domestic Territory of a Country
14.What is normal resident of a country
15.Nominal GDP and Real GDP
S.NTopics
1.What is GDP Deflator
2.What are externalities in economics
3.Limitations of GDP as a measure of welfare
S.NTopics
1.Items to be included in National income
2.Items to be included in Domestic Income
S.NTopics
1.National Income and Related Aggregates, formula, Definition, process
2.Value added Method, formula, Definition, process
3.Income Method, formula, Definition, process
4.Expenditure Method, formula, Definition, process
5.
S.NTopics
1.150+ Numerical of Value Added Method
2.150+ Numerical of Income Method
3.150+ Numerical of Expenditure Method
4. 150+ Numerical of National Income and related aggregates
S.NTopics
1.250+ MCQs of National Income
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Anurag Pathak

Anurag Pathak is an academic teacher. He has been teaching Accountancy and Economics for CBSE students for the last 18 years. In his guidance, thousands of students have secured good marks in their board exams and legacy is still going on. You can subscribe his youtube channel and can download the Android & ios app for free lectures.

Articles: 2015

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