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Nominal vs Real GDP



Nominal GDP, Real GDP and GDP with PPP (purchasing power parity) are three ways or three very popular forms of GDP that we come across. Generally , we find these terms to be very much familiar but at the same time we are not able to define these terms apart. It is very common to observe among Indians as we discuss the politics very much. People argue about the country’s growth, GDP but they don’t know it’s real meaning. They only talk what they watch in TV and read in newspaper.
This article is purposefully written to make you clear on these terms.But before diving into the nominal and real GDP, we should have clarity about GDP. We shoud be having the good idea about what the GDP is?

What is gdp meaning ?

Before moving further, I have two questions for you guys:-
1) What is gdp Full-form?
2) What is the GDP of India ?
If you know the answers, it’s great but if you don’t, no worries, this is what you are going to learn here.
what is  gdp
So the GDP stands for Gross Domestic Product. You must be having an idea that GDP is used to estimate the size of any country’s economy. In very simple and basic terms, GDP is the value of finished goods and services created in a country during a specific period of time. Let us understand it with an example.
Suppose that we have 10 mobile phones being manufactured this year with one mobile holding the value of Rs.10,000. In this case, our growth in GDP would be equal to the total value of these manufactured mobile phones ( we are only taking the simple case, while calculating the GDP of a country, value of each and every product manufactured will be covered) . The total value of mobile phones is 10 X 10,000 = 1lakh. If we had a gdp of our country to be 10 lakh till previous year, this year , it will become 11lakh. This is the general way , how the GDP of a country is calculated.

Nominal vs Real GDP differences

So by now, you must have got a good idea about what does the GDP mean ? Now, its the turn to discuss the concept of nominal GDP and real GDP.
Nominal GDP definition: Nominal GDP is an assessment of economic production in an economy but includes the current prices of goods and services in its calculation.It does not account for the changes brought in the country by inflation.

Real GDP definition: Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year (expressed in base-year prices) and is often referred to as "constant-price," "inflation-corrected", or "constant dollar" GDP.
what is  gdp fred graph
if you want check out the growth of countries and their GDP via such graphs, you can visit the website of Federal Reserve Economic Data

We will try to understand the difference between the two terms with the help of an example. Let's take the above situation of mobile phones. Suppose in year 2019 India had GDP of 10 lakh and it produced mobile phones with one piece worth rupees 10000 .So we had seen that this will add Rs.1,00,000 to our GDP and total GDP will now become 11 lakh . But suppose in year 2020 ,the price of the mobile phone increase due to inflation and it becomes eleven thousand rupees ,now the total value added by final goods this year will be 10 x 11000 ,which is equal to rupees 1,10,000 .Now you can absolutely observe that there has been no significance increase in the productivity of the country but GDP added this year is 10,000 rupees more than that of previous financial year. This is caused due to the inflation and the GDP calculated by this method is known as nominal GDP . If we don't consider the factor of inflation in our GDP calculation i.e. We reduce the inflation value from the price of mobile and consider it to be of the value of Rs.10,000 this year also, then the increase in GDP would be one lakh only and total GDP of our country would become 12lakh this is what we call as real GDP.
Now take an another example in which , the inflation in our country is negative i.e. in the financial year 2019-20, we see deflation. Therefore, the price of mobile phones in 2020 will decrease to Rs. 9,000. Now , the change in price due to inflation is Rs. -1,000. So, to calculate the real GDP, we will use the price of mobile to be10,000 but for Nominal GDP, we will use the current price of mobile phone, which is Rs.9,000. So the addition in nominal gdp would be 9000 X 10 = Rs. 90,000. This time, our total nominal GDP would be Rs.11,90,000 which is les than the real GDP.
what is  gdp fred graph

So you can see here that the Nominal GDP can vary hugely from the real GDP on the basis of inflation in the country. But , real GDP shows the real growth of country.

things you should know

• As all countries in the world reports different inflation rates from each other, even they see fluctuating inflation rates every year in their own country also. Therefore, Nominal GDP is not a reliable way to compare the two countries and thus, we use Real GDP for this purpose. So the GDP which we see used in the comparison of two countries is the Real one.
• As each year , we face different inflation rates, so in the calculation of real GDP ,we use a base year to adjust the inflation with . This helps us to compare our country’s growth over a couple of years easily. Currently, we use the FY 2011-12 for the calculation of the real gdp. Before it, we used 2004-05.
• According to the real gdp , India is the fifth largest economy in the world. gdp of all countries in 2019 comparison
Remember that, using GDP to consider any country developed is very much overrated. You have to understand that, GDP only shows the size of country’s market. It never depicts the living standard of any country. With respect to GDP, India is the fifth largest economy, but we can’t say it to be the fifth most developed country. India enjoy such a large GDP only due to it’s huge population. If we compare it by gdp per capita, India does not find it’s place even in the top 100 nations.

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