Q. 265.0( 1 Vote )

# Explain the conce

Nominal GDP: It is calculated considering the prices of the current year, hence it is also known are GDP at Current Prices. It is generally used to estimate the current GDP and is not used for calculating the growth rate. It is generally higher than Real GDP.

Nominal GDP = total investments + Government spending + Consumption + (exports – imports)

Real GDP: It is calculated using prices in a particular base year. In other words, it is the Nominal GDP adjusted for inflation and is known as GDP at Constant Prices. Real GDP is used for calculating the growth rate.

When price increases, and to normalize the effect of increased price Nominal GDP is converted into Real GDP. For this conversion, GDP deflator is used.

The GDP deflator is the average value of the prices of all goods and services that contribute to GDP.

So, GDP deflator=Nominal GDP/Real GDP * 100

Example: If nominal GDP =Rs10000Cr and real is 1000Cr

Then, GDP deflator=10000/1000 * 100= 1000

Real GDP=10000/1000 *100= 1000Cr

OR

National Income is the total value of all final goods and services produced by the country in a certain year. The growth of National Income helps to know the progress of the country.

There are three methods of calculating national income:

1. Income method

2. Product method

3. Expenditure method

Product method: It is used by economists to calculate GDP at market prices, which are the total values of outputs produced at different stages of production. In this method, two approaches—’Final Product Approach’ and ‘Value Added Approach’—are adopted.

Final Product Approach: in this method, we measure the value of all that is produced in the domestic economy.it is also known as Gross domestic product.

Problems with this approach:

1. the estimates are not much reliable because it is difficult to get accurate data of production, prices, and costs.

2. In this method, it is difficult to distinguish between final goods and intermediate goods. Hence double counting must be avoided while calculating.

Value Added Approach: To overcome the issues with Product method used. In this method, the domestic value is calculated by totalling the net value added by the producing units within the territory.

Precautions to be taken:

1. Double counting to be avoided.

2. Only the final products to be added.

3. Sale of second-hand goods is not to be included as these are already accounted for during the year they were produced..

4. Production from illegal activities must not be included.

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