Gr xii-eco-macro-ch-2-s8
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This document discusses real GDP, nominal GDP, and the GDP deflator. Real GDP is output valued at constant prices, reflecting only changes in quantity, while nominal GDP uses current prices and reflects changes in both quantity and price. The GDP deflator measures inflation as the ratio of nominal GDP to real GDP. While GDP measures economic output, it has limitations as a welfare indicator since it does not account for distribution of output or externalities.
Gr xii-eco-macro-ch-2-s8
- 2. GDP and Welfare Grade XII Economics
- 3. Learning Objective • To apply the formula for calculating GDP deflator • To comprehend the concepts of real and nominal GDP • To understand the relation between GDP and Welfare
- 4. Current Prices and Constant Prices • Current prices refer to the prevailing prices.(2020 prices) • Constant prices refer to a base year prices.(2012 prices or prices of any other past year.
- 5. Nominal GDP • GDP at current prices is the market value of all the final goods and services produced within the domestic territory of a country during an accounting year, estimated using current prices. • Nominal GDP = Q x P • GDP can increase when there is increase in either Q or P. • If it is increasing due to increase in Q, it is real increase. • If it increases due to increase in P, it is only monetary increase in GDP. • Nominal GDP = Real GDP × 𝑷𝒓𝒊𝒄𝒆 𝑰𝒏𝒅𝒆𝒙 𝟏𝟎𝟎
- 6. Real GDP •GDP at constant prices is the market value of all the final goods and services produced within the domestic territory of a country during an accounting year, estimated using base year prices. •It increases only when quantity increases. Real GDP= Nominal GDP × 𝟏𝟎𝟎 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑷𝒓𝒊𝒄𝒆 𝑰𝒏𝒅𝒆𝒙
- 7. • It is the ratio of nominal GDP to real GDP. • GDP Deflator = 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷 𝑹𝒆𝒂𝒍 𝑮𝑫𝑷 × 100 • The GDP deflator is a measure of inflation. This ratio shows the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output. It shows the percentage change in prices. • Real GDP= 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷 𝑮𝑫𝑷 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓 • Nominal GDP= Real GDP × GDP Deflator GDP Deflator
- 8. Calculation 1. If real GDP is ₹ 18,000 crores and Real GDP is ₹ 12,000 crores calculate GDP deflator. 2. If nominal GDP is ₹ 840 crores and GDP deflator is 𝟕 𝟓 calculate real GDP.
- 9. Solution 1.GDP Deflator=Nominal GDP/ Real GDP = 1800/1200 = 150% 2. Real GDP = 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷 𝑮𝑫𝑷 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓 = 𝟖𝟒𝟎 𝟕 𝟓 =840 × 𝟕 𝟓 = 600
- 10. Limitations of GDP as an Index of Welfare •GDP may not be uniformly distributed among different sections of the society. •Non-market transactions are not included in GDP. •Negative and positive externalities are not included in the estimation of GDP. •GDP may rise due to rise in prices. •Population growth reduces per capita GDP.
- 11. Review • What is GDP deflator? • Distinguish between nominal and real GDP. • Explain limitations of GDP as an indicator of welfare.
- 12. Recapitulation • GDP at current prices is the market value of all the final goods and services produced within the domestic territory of a country during an accounting year, estimated using current prices. • GDP at constant prices is the market value of all the final goods and services produced within the domestic territory of a country during an accounting year, estimated using base year prices. • The GDP deflator is a measure of inflation. This ratio shows the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output. • GDP is not an indicator of welfare.