WHAT IS GDP?
- GDP is the total value of all goods and services produced in the economy in a given period of time.
- It refers to an estimate of the total value of an economy’s production and services; usually considered over a one year period.
- It is evaluated at present market prices.
- In 2019- We produced 40 pens & 30 books.
- If price of 1 Pen is Rs.10 and price of 1 Book is 20
- Thus, (40 × 10) + (30 ×20) = 400+600 = 1000 (It means in 2019 we added Rs.1000 to our GDP)
- Suppose till 2018,
- Our overall GDP value was 10,000. In 2019, we added Rs. 1000 to our GDP.
- Thus the GDP growth rate is 10%
- This is called Nominal GDP rate.
- While nominal GDP is calculated at the current market price,
- Whereas real GDP adjusts for price changes due to inflation.
- Suppose in 2012, Price of Pen & Book was 5 & Rs. 10 respectively.
- In 2012, We produced same number- 40 pens & 30 books.
- Thus, (40 × 5) + (30 ×10)= 200+300= 500
- Thus, In 2012 we produced Rs.500 value of goods whereas in 2019 we produced Rs. 1000 value of goods.
- But the important thing is- we produced same quantity of goods i.e. 40 pens & 30 books.
NOMINAL GDP VS REAL GDP
- Remember till 2018, Our GDP was Rs. 10,000
- Thus in 2019. Nominal GDP growth rate will be @ 10% (current market price- Rs.1000)
- Real GDP growth rate will be @ 5% (2012 price- Rs.500)