[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, India's 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%??
It's nothing but inflation. Just because onion prices rose thanks to Government's faulty food policy or black marketers, doesn't 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 2010's production to some base year.
Let's 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.
2010's 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.
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 heavy inflation)
IF it was near to 100, that'd mean, there is no difference in real and nominal GDP hence there is no inflation in India.
We've WPI and CPI to measure inflation, but they don't include each and every product and service available in India, while with GDP deflator, we can get an inflation-picture of them too.
btw, DONOT CONFUSE ABSOLUTE GDP NUMBER WITH PERCENTAGE RISE.
Newspaper: "Montek Singh said we've got 8% GDP in 2010"
That doesn't mean India's GDP is 8%. It only means whatever was our GDP in 2009, we've increased it by 8%.
IF India produced goods and services worth 100 billion $ in 2009, then in 2010 we've produced goods n services worth 108 billion $. That's why GDP rose by 8%.
Now back in our onion example,
(*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, India's 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%??
It's nothing but inflation. Just because onion prices rose thanks to Government's faulty food policy or black marketers, doesn't 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 2010's production to some base year.
Let's 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.
2010's 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 heavy inflation)
IF it was near to 100, that'd mean, there is no difference in real and nominal GDP hence there is no inflation in India.
We've WPI and CPI to measure inflation, but they don't include each and every product and service available in India, while with GDP deflator, we can get an inflation-picture of them too.
btw, DONOT CONFUSE ABSOLUTE GDP NUMBER WITH PERCENTAGE RISE.
Newspaper: "Montek Singh said we've got 8% GDP in 2010"That doesn't mean India's GDP is 8%. It only means whatever was our GDP in 2009, we've increased it by 8%.
IF India produced goods and services worth 100 billion $ in 2009, then in 2010 we've produced goods n services worth 108 billion $. That's why GDP rose by 8%.
Now back in our onion example,
2009's real GDP=3000So real-GDP has rose by 0% in two years.
2010's real GDP=3000
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