Tuesday, September 11, 2018

Economic Growth versus Economic Development

Real versus Nominal GDP

Nominal GDP is the money value of all the goods and services produced in a year. Nominal GDP is calculated at the current market prices. However, Nominal GDP does not truly indicate the real performance of the economy as the prices changes over time.
Back to Basics: Suppose, India as a country only produced cars in its economy. In the year 2016, India produced 100 Cars which were sold at RS 100,000 each. India’s GDP in this case will be RS 10,00,00,00 (100*100000).
In the year 2017, supposedly due to demonetization India only produced only 90 Cars, but their price has risen to RS 15,0000. India’s GDP in the year 2017 will be 1,35,00,000.
The Increase from RS 10,00,00,00 to RS 1,35,00,000 is the nominal GDP. The GDP of India has risen not because we have produce more units of Car but because the prices of the car have increased.
Therefore, the Nominal GDP does not capture the changes in the real economy.

Real GDP
The real GDP is calculated as the money value of all the goods and services produced in a year using the constant set of market prices that have prevailed in the certain chosen base year. The Real GDP is calculated at a fixed set of prices so that only the changes in real output or real production of goods and services is captured.
Back to Basics: Suppose, India as a country only produced cars in its economy. In the year 2016, India produced 100 Cars which were sold at RS 100,000 each. India’s GDP in this case will be RS 10,00,00,00 (100*100000).
In the year 2017, supposedly due to demonetization India only produced only 90 Cars. If we take the year 2011-12 as the base year and assumes that the price of the car in that year was RS 90,000. Then, India’s Real GDP will be 90*90,000= 81,00,000.
The Nominal GDP is RS 1,35,00,000 whereas the Real GDP is RS 81,00,000. The difference is due to the prices which have risen from 90,000 in the base year to RS 15,00,00 in the current year

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