Answer the following question.
How is Real Gross Domestic Product (GDP) different from Nominal Gross Domestic Product (GDP)? Explain using a numerical example.
The difference between Real Gross Domestic Product and Nominal Gross Domestic Product is given as follows:
|Basis||Real GDP||Nominal GDP|
|Definition||1. Real GDP refers to the total market value of the output at the base year prices.||1. Nominal GDP refers to the total market value of the output at the current year prices.|
|Change||2. The value of Real GDP can change only when the volume/quantity of output changes over time.||2. The value of Nominal GDP can change only with a change in the prices over time.|
|Index of Social Welfare||3. It can be treated as an index of economic growth i.e. higher Real GDP implies higher economic growth.||3. 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.
|Current Year Price
|Base Year Price
Nominal GDP Quantity x Current Year Prices (A x B)
Real GDP Quantity x Base Year Prices (A x C)