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Question

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


Solution

(i) Real GDP: When GDP is measured at constant prices or the base year's prices, it is known as Real GDP. Real GDP will increase only when three is an increase in the flow of goods and services in the economy.
(ii) Nominal GDP: When GDP is measured at the prevailing or the current year's prices, it is known as Nominal GDP. Nominal GDP may increase even when there is no increase in the flow of goods and services in the economy.
Example, if we measure GDP of India for the year 2013-2014 at 2013-2014 prices, it is GDP at Current prices or Nominal GDP.
However, taking 2004-05 as the base year and then measuring GDP of 2013-14 at 2004-05 prices, the GDP so estimated is known as GDP at Constant prices or Real GDP.

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