Question

Distinguish between Real Gross Domestic Product and Nominal Gross Domestic Product using a numerical example.

Hint:

Real GDP is valued at constant (base year) prices and nominal GDP at current prices. Example: base 2022 price Rs. 10, 2025 price Rs. 15, output 100 units gives Real GDP 1,000 and Nominal GDP 1,500.

Answer 1

Step 1: Understanding the Concept:
GDP is the market value of all final goods and services produced inside the domestic territory in one year. The value depends on two things: how much is produced and at what price it is counted.
Real GDP and nominal GDP differ in the prices used to count the value.

Step 2: Real GDP.
Real GDP is the market value of final goods and services produced in the domestic territory in a given period, measured at constant prices (the prices of a base year).
Because the prices stay fixed, a change in real GDP shows a change in output only.

Step 3: Nominal GDP.
Nominal GDP is the market value of the same output, measured at current year prices.
A change in nominal GDP can come from a change in output, a change in prices, or both.

Step 4: Numerical example.
Take 2022 as the base year and 2025 as the current year. Output is 100 units in both years. The price is Rs. 10 in 2022 and Rs. 15 in 2025.

Year	Price (Rs.)	Output (units)	Real GDP (P0 x Q1)	Nominal GDP (P1 x Q1)
2022	10	100	1,000	1,000
2025	15	100	1,000	1,500

In 2025, Real GDP = 10 x 100 = Rs. 1,000. Nominal GDP = 15 x 100 = Rs. 1,500.

Step 5: Read the result.
Output did not change, so Real GDP stays at Rs. 1,000. The price rose, so Nominal GDP rose to Rs. 1,500. The extra Rs. 500 is due to inflation, not to more production.

Final Answer:
Real GDP uses base year (constant) prices and Nominal GDP uses current year prices. In the example, Real GDP is Rs. 1,000 and Nominal GDP is Rs. 1,500 for 2025.