Question
Write brief notes on the following:
Conversion of Nominal GDP into Real GDP.
Solution
Conversion of Nominal GDP into Real GDP. To neutralise the effect of price increases and to know the real change in physical output, Nominal GDP is converted into Real GDP. For this purpose GDP deflator is used. GDP deflator measures the average level of prices of all the goods and services that make up GDP. It is calculated as the ratio of nominal GDP to real GDP multiplied by 100. Algebraically:
For example, if nominal GDP (quantity of goods × current prices) is र 21000 crores and real GDP is र 20000 crores, then:
To eliminate the effect of rise in price, we convert nominal GDP into real GDP with the help of GDP deflator on the basis of above data.
For example, if nominal GDP (quantity of goods × current prices) is र 21000 crores and real GDP is र 20000 crores, then:
To eliminate the effect of rise in price, we convert nominal GDP into real GDP with the help of GDP deflator on the basis of above data.
