Real GDP and Nominal GDP

1. GDP at Current Prices (Nominal GDP)

• GDP measured at the market prices of the same year in which it is produced.
• Example: India's GDP for 2012–13, measured at 2012–13 prices = Nominal GDP.

2. GDP at Constant Prices (Real GDP)

• GDP measured at the prices of a chosen base year.
• Reflects changes in physical output only — price changes are excluded.
• Considered a better index of real economic growth than Nominal GDP.

Value of current year output at current year prices.

Nominal GDP = ∑ (Current year quantity × Current year price)

Value of current year output at base year prices.

Real GDP = ∑ (Current year quantity × Base year price)

• A deflator of 150 means prices are 1.5 times the base-year price level.
• When prices change, Nominal GDP alone cannot indicate whether real production has increased — hence the GDP Deflator is needed.

Using nominal GDP = GDP and real GDP = gdp:

\[\text{GDP Deflator}=\frac{\text{Nominal GDP}}{\mathrm{Real~GDP}}\]

In percentage form:

\[\text{GDP Deflator }(\%)=\frac{\text{Nominal GDP}}{\mathrm{Real~GDP}}\times100\]

• Measures the cost of a fixed basket of consumer goods in the current year as a percentage of its cost in the base year.
• Example used: A basket of rice and cloth - cost is compared between base year and the current year.

\[\mathrm{CPI}=\frac{\text{Cost of fixed basket in current year}}{\text{Cost of same basket in base year}}\times100\]