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| 1. |
Explain the concepts of Real GDP and Nominal GDP, using a suitable numerical example. |
| Answer» Solution :NOMINAL GDP: It is calculated considering the prices of the current year, hence it is also known are GDP at Current Prices. It is GENERALLY used to estimate the current GDP and is not used for calculating the growth RATE. It is generally higher than Real GDP.Nominal GDP = total investments + Government spending + Consumption + (exports – imports)Real GDP: It is calculated using prices in a particular base year. In other words, it is the Nominal GDP ADJUSTED for inflation and is known as GDP at Constant Prices. Real GDP is used for calculating the growth rate.When price increases, and to normalize the effect of increased price Nominal GDP is converted into Real GDP. For this CONVERSION, GDP deflator is used.The GDP deflator is the average value of the prices of all goods and services that contribute to GDP.So, GDP deflator=Nominal GDP/Real GDP * 100Example: If nominal GDP =Rs10000Cr and real is 1000CrThen, GDP deflator=10000/1000 * 100= 1000Real GDP=10000/1000 *100= 1000Cr | |