Question

Answer the following question:

How is Real Gross Domestic Product (GDP) different from Nominal Gross Domestic Product (GDP)? Explain using a numerical example.

How is Real Gross Domestic Product different from Nominal Gross Domestic Product?

Answer 1

The difference between Real Gross Domestic Product and Nominal Gross Domestic Product is given as follows:

Basis	Real GDP	Nominal GDP
Definition	Real GDP refers to the total market value of output at base-year prices.	Nominal GDP refers to the total market value of the output at the current year’s prices.
Change	The value of Real GDP can change only when the volume/quantity of output changes over time.	The value of Nominal GDP can change only with a change in prices over time.
Index of Social Welfare	It can be treated as an index of economic growth, i.e., higher Real GDP implies higher economic growth.	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 × Current Year Prices (A × B)	Real GDP Quantity × Base Year Prices (A × C)
x	100	10	5	1,000	500