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[Economy Q] GDP DEFLATOR, REAL AND NOMINAL GDP

GDP mean money value of everything* produced inside India.
(*Everything means goods and services.)
100 kg. of onion produced in 2009, market price = 20 Rs/kg.
100 kg of onion produced in 2010, market price =70 Rs/kg (courtesy: Sharad Pawar)
So, India’s GDP has increased at the rate of 250% in a year! But the World bank and leading economists say we can hardly reach 9% GDP increase rate per year. So what is this 250%??
It’s nothing but inflation. Just because onion prices rose thanks to Government’s faulty food policy or black marketers, doesn’t mean that real-GDP has increased and that our contry has prospered.
So how do we find real GDP for 2010, when prices of everything have increased due to inflation?
We need to compare 2010′s production to some base year.
Let’s pick 2003-04 as base year. So whatever price Onion had in that year, will be our base price.
IN 2003-04, average price of 1 kg onion was 30 Rs. A kilo.
2010′s GDP= 1 kg onion price of base year (2003-04) *multiply* total onions produced in 2010
=30 x 100
=Rs. 3,000 is our real-GDP for 2010.

So Formula: Real GDP= Price of xyz item in base year x Quantity produced in current year.

GDP Deflator

 Image: Formula

In our onion case
Nominal GDP in 2010= 70 Rs/kg x 100 kg=Rs. 7000
Real GDP as we calculated=3000.
So, GDP deflator= [7000/3000]x100= 233

What does it mean?
Here, GDP deflator is >greater than 100. That means there is inflation. (very very heavy inflation)
IF it was near to 100, that’d mean, there is no difference in real and nominal GDP hence there is no inflation in India.
We’ve WPI and CPI to measure inflation, but they don’t include each and every product and service available in India, while with GDP deflator, we can get an inflation-picture of them too.

btw, DONOT CONFUSE ABSOLUTE GDP NUMBER WITH PERCENTAGE RISE.

Newspaper: “Montek Singh said we’ve got 8% GDP in 2010″
That doesn’t mean India’s GDP is 8%. It only means whatever was our GDP in 2009, we’ve increased it by 8%.
IF India produced goods and services worth 100 billion \$ in 2009, then in 2010 we’ve produced goods n services worth 108 billion \$. That’s why GDP rose by 8%.
Now back in our onion example,

2009′s real GDP=3000
2010′s real GDP=3000

So real-GDP has rose by 0% in two years.

27 comments to [Economy Q] GDP DEFLATOR, REAL AND NOMINAL GDP

• all in one materials,e-books and materials

awesome effort in explaining the concepts very easily…

thanks a lot

• Ganesh

Excellent work sir….

• bhaji

thank u sir

• Jaz

Superb sir.. The way you explained these things are simply great..

• arjun c p

mrunal sir,
quoting from your article the following lines “We’ve WPI and CPI to measure inflation, but they don’t include each and every product and service available in India, while with GDP deflator, we can get an inflation-picture of them too.”
suppose let us assume that in a base year(assuming base year to be near by the present year of consideration) there are no led tv’s produced ,so base price not known.
At present led tv’s are being manufactured . so my question is, how do compute the GDP @ real price? and how does deflator accounts for the new led tv’s?

• Partho

Only those items are included which were available during the base year, new items will be added whenever the base year is changed.

• arjun c p

Partho sir ,you mean to say different basketed goods for WPI,CPI and GDP deflator..IF all are same ,then the figures computed in each case should have been same.

• Partho

No still it wont be same, because weightage of goods are different in each case. And moreover, WPI and CPI do not include services, Plus there will be difference in CPI and WPI due to host of reasons, like variability in taxes.
The objective of CPI and WPI are different, CPI is from consumer point of view. Which is not very useful for Industrialists.

• kannan

Thanks & good by explaining things in simple examples

• Samarth

Thanks a lot sir.

• priya

really excellent………….my god u r awesome sir………..

• priya

really excellent…….my god u r awesome…..

• Ruchin

The bribe which we have to give for getting almost every work done must be calculated in GDP as we are paying for services of public servant .

• Harshit

either GDP is increase or decreased, but what is better for country – GDP increased or decreased.???
IF GDP is increased then Inflation increased.
and If GDP is decreased then money value of everything produced inside India is decreased. so our export is decreased. so income of GOV. is also decreased. What is better for country.

• Ram

Theoretically GDP deflator concept is perfect. But it is very difficult for an economy to calculate GDP at constant prices. GDP is always calculated at current prices and deflated using Headline Inflation. This is a much easier concept of arriving at real GDP than multiplying the current years production with the prices of a year pegged.

• sunil nayak

Really a Good & understandable article.

• KUMAR RAHUL

kudos

• sohail ahmed

excellent brother…at last got to my brains!!!

• Tomar

Nice sir.

• Iranna Ashok Chandargi

Sir you explain the concepts very nicely

• MANAS RAJ PATEL

awesome sir

• Dinesh Kumar

EXCELLENT

• KD

Hi Mrunal sir
on what basis and who decides the base year?Do countries all round the world use the same Base year and GDP calculation ?

• Divya

nic

• Pranav Kumar

My question is , when we calculate GDP Deflator does it count all the articles produced or only one article is calculated at a time. ?

• Priyanka Singh

Sir Your Article Really Helpful i have done my coaching from drishti the vision from vikas diyakirti and now preparing myself and taking idea from your site , i request to your please put important article analyses from The Hindu So its graceful to me thanks please start The Hindu Columns also

Thanking You Sir
Priyanka Singh

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