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Mrunal [Economy Q] GDP DEFLATOR, REAL AND NOMINAL GDP Print

[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, Indias 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%?? Its nothing but inflation. Just because onion prices rose thanks to Governments faulty food policy or black marketers, doesnt 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 2010s production to some base year. Lets 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. 2010s 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
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Mrunal [Economy Q] GDP DEFLATOR, REAL AND NOMINAL GDP Print

heavy inflation) IF it was near to 100, thatd mean, there is no difference in real and nominal GDP hence there is no inflation in India. Weve WPI and CPI to measure inflation, but they dont include each and every product and service available in India, while with GDP deflator, we can get an inflationpicture of them too. btw, DONOT CONFUSE ABSOLUTE GDP NUMBER WITH PERCENTAGE RISE. Newspaper: Montek Singh said weve got 8% GDP in 2010 That doesnt mean Indias GDP is 8%. It only means whatever was our GDP in 2009, weve increased it by 8%. IF India produced goods and services worth 100 billion $ in 2009, then in 2010 weve produced goods n services worth 108 billion $. Thats why GDP rose by 8%. Now back in our onion example, 2009s real GDP=3000 2010s real GDP=3000 So real-GDP has rose by 0% in two years.

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