Explain the concepts of Real GDP and Nominal GDP, using a suitable numerical example.

Dear Student

Real GDP is the value of current output at some base year prices. It is known as GDP at Constant Prices.Base year is a stable year in which there were no natural calamities. Real GDP is used for calculating the growth rate.

Nominal GDP is the value of current output at 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.

​​The formula for conversion of GDP at current prices into GDP at constant prices;
GDP at constant prices=GDP at current prices/ Price lndex for the Current Year X100
where Base Year = Price index of base year is always taken to be 100.

Numerical Example
Convert nominal GDP into real GDP prices.
(a) GDP at current year prices is Rs. 1,50,000 and price index for the current year is150.
Solution.
GDP at constant prices =Rs.1,50,000/150X lOO
=Rs. 1,00,000

(b) GDP at current year prices is Rs3,00,000 and current year price index is300.
Solution.
GDP at constant prices =Rs 3,00,000/300X lOO
=Rs.100000
Regards