2.3 Real GDP, Nominal GDP and GDP Deflator

Chapter Notes (Chapter को full Notes)
TU Solution(Extra questions सहित)

… Hey there! Welcome to the third lesson of Unit 2. In this lesson, we will be covering Real GDP, Nominal GDP and GDP Deflator. As usual, I ask you to carefully study all these notes and think aloud or write down what you’ve learnt for effective memory. So, let’s get started.

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Real GDP, Nominal GDP and GDP Deflator – के रहेछ यो भनेको?

GDP measured at market price of the base year is known as real GDP || GDP measured at market price of the current year is known as nominal GDP || and The ratio between nominal GDP and real GDP of a particular year is known as GDP deflator.

Real GDP

Real GDP can be defined as the GDP measured at the market price of the base year. Base year, here, refers to the past year. For example, if 2021 is selected as the base year, then real GDP of 2022 is calculated by taking the quantities of all goods and services produced in 2022 and multiplying them with the market prices of 2021. The following formula is used to calculate the real GDP:

Real GDP = P₀Q₁ + P₀Q₂ + P₀Q₃ + . . . + P₀Q_n
where,
P₀ = Base year’s price
Q = Quantity of goods & services produced in the current year

By its name itself, we can understand that REal GDP gives a more accurate picture of the economic growth of any country.

एकपटक Real GDP को background बुझ्नको लागि, यो पनि हल्का पढ्नुस् ल !

GDP can increase for two main reasons. One, when the economy is producing more goods and services, and two, due to inflation, which means the prices of goods and services are going up.

To make sure we understand the real change in production over time, we use a measure called “real GDP.” It shows how much the country is actually producing by considering the changes in output, not just changes in prices.

Real GDP measures the total amount of goods and services produced within a country during a specific time period. It calculates this value using constant market prices from a chosen base year, which is a year in the past. By comparing current production levels with the prices from the base year, we can see how the total production of goods and services has changed over time.

Nominal GDP

Nominal GDP can be defined as the GDP measured at the market prices of the current year. It includes all the changes in market prices that have happened during current year due to inflation or deflation. The following formula is used to calculate the nominal GDP:

Nominal GDP = P₁Q₁ + P₂Q₂ + P₃Q₃ + . . . + P_nQ_n
where
P = Price, and
Q = Quantity of goods & services produced in the current year

GDP Deflator

The GDP deflator can be defined as the ratio between nominal GDP and real GDP of a particular year, multiplied by 100. It is a price index that shows the overall level of inflation or deflation in an economy. It is measured by dividing Nominal GDP by Real GDP and then multiplying the result by 100. Following is the formula used for calculating the GDP deflator.

GDP deflator = Nominal GDP/Real GDP x 100

GDP deflator is useful in the calculation of the rate of inflation between any two periods of time. The following formula is used to calculate the rate of inflation:

Rate of inflation = Change in GDP deflator/ GDP deflator of the previous year x 100

Descriptive Numerical Answer Questions

Q) Compute the nominal GDP, real GDP, GDP deflator and rate of inflation for an economy which purchases only two goods X and Y.

Year	Px	Qx	Py	Qy
2017	Rs 30	1500	Rs 10	1000
2018	Rs 40	2000	Rs 20	1500

Solution

Computation of Nominal GDP
For Nominal GDP, we have:
⇒ Nominal GDP = sum of the current year price x current year quantity of all the goods.
or, Nominal GDP = P_x × Q_x + P_y × Q_y
Therefore,
Nominal GDP in In 2017 is: 30 x 1500+ 10 x 1000 = Rs. 55,000/-
Nominal GDP in In 2018 is: 40 × 2000+ 20 x 1500 = Rs. 110,000/-

Computation of Real GDP
For Real GDP, we have:
⇒ Real GDP = sum of the base year price x current year quantity of all the goods.
Therefore,
⇒ Real GDP in In 2017 is: 30 × 1500+ 10 × 1000 = Rs. 55,000/-
⇒ Real GDP in In 2018 is: 30 × 2000+ 10 × 1500 = Rs. 75,000/-

Computation of GDP deflator
We have:
⇒ GDP deflator = Nominal GDP/Real GDP × 100
Therefore,
⇒ GDP in In 2017 is: 55000/55000 × 100 = 100
⇒ GDP in In 2018 is: 110,000/75,000 × 100 = 147

Computation of rate of inflation in 2018
We have:
⇒ Inflation = (Year 2 – Year 1)/Year 1 × 100%
or, Inflation = Change in GDP deflator/Previous year GDP deflator × 100%
or, Inflation = (147 -100)/100 × 100%
∴ Inflation = 47%

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○○○ के रहेछ त Real GDP calculate गर्ने formula?

Real GDP = P₀Q₁ + P₀Q₂ + P₀Q₃ + . . . + P₀Q_n
where,
P₀ = Base year’s price
Q = Quantity of goods & services produced in the current year

अनि Nominal GDP को के रहेछ?

Nominal GDP = P₁Q₁ + P₂Q₂ + P₃Q₃ + . . . + P_nQ_n
where
P = Price, and
Q = Quantity of goods & services produced in the current year

○○○ र GDP Deflator को के रहेछ?

GDP deflator = Nominal GDP/Real GDP x 100

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Group A – Brief Answer Questions

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Real GDP, Nominal GDP and GDP Deflator

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Q) What is real GDP? [2073 Q.No.8]

→ Real GDP can be defined as the GDP measured at the market price of the base year. Base year, here, refers to the past year. For example, if 2021 is selected as the base year, then real GDP of 2022 is calculated by taking the quantities of all goods and services produced in 2022 and multiplying them with the market prices of 2021. The following formula is used to calculate the real GDP:

Real GDP = P₀Q₁ + P₀Q₂ + P₀Q₃ + . . . + P₀Q_n
where,
P₀ = Base year’s price
Q = Quantity of goods & services produced in the current year

Q) What is nominal GDP?

→ Nominal GDP can be defined as the GDP measured at the market prices of the current year. It includes all the changes in market prices that have happened during current year due to inflation or deflation. The following formula is used to calculate the nominal GDP:

Nominal GDP = P₁Q₁ + P₂Q₂ + P₃Q₃ + . . . + P_nQ_n
where
P = Price, and
Q = Quantity of goods & services produced in the current year

Q) What is GDP deflator?

→ The GDP deflator can be defined as the ratio between nominal GDP and real GDP of a particular year, multiplied by 100. It is a price index that shows the overall level of inflation or deflation in an economy. It is measured by dividing Nominal GDP by Real GDP and then multiplying the result by 100. Following is the formula used for calculating the GDP deflator.

GDP deflator = Nominal GDP/Real GDP x 100

Brief Numerical Answer Questions

Q) When nominal and real GDP are 170.43 million and 110.37 million respectively, what is the value of GDP deflator?

Solution

We have
⇒ GDP deflator = Nominal GDP/Real GDP x 100
or, GDP deflator = 170.43/110.37 x 100
= 154.42 million

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Group B – Descriptive Answer Questions

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Real GDP, Nominal GDP and GDP Deflator

Q) Explain the concept of real GDP, nominal GDP and GDP deflator

Real GDP

Real GDP = P₀Q₁ + P₀Q₂ + P₀Q₃ + . . . + P₀Q_n
where,
P₀ = Base year’s price
Q = Quantity of goods & services produced in the current year

By its name itself, we can understand that REal GDP gives a more accurate picture of the economic growth of any country.

Nominal GDP

Nominal GDP = P₁Q₁ + P₂Q₂ + P₃Q₃ + . . . + P_nQ_n
where
P = Price, and
Q = Quantity of goods & services produced in the current year

GDP Deflator

GDP deflator = Nominal GDP/Real GDP x 100

GDP deflator is useful in the calculation of the rate of inflation between any two periods of time. The following formula is used to calculate the rate of inflation:

Rate of inflation = Change in GDP deflator/ GDP deflator of the previous year x 100

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Descriptive Numerical Answer Questions

Q) Compute the nominal GDP, real GDP, GDP deflator and rate of inflation for an economy which purchases only two goods X and Y.

Year	Px	Qx	Py	Qy
2017	Rs 30	1500	Rs 10	1000
2018	Rs 40	2000	Rs 20	1500

Solution

Computation of GDP deflator
We have:
⇒ GDP deflator = Nominal GDP/Real GDP × 100
Therefore,
⇒ GDP in In 2017 is: 55000/55000 × 100 = 100
⇒ GDP in In 2018 is: 110,000/75,000 × 100 = 147

Group C – Analytical Answer Questions

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