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Nominal GDP is defined as the GDP evaluated (valued) at the current market prices.
It includes all the changes in market prices.
If price level increases remaining output constant, nominal GDP increases and vice versa.
For example,
If we have to calculate nominal GDP of 2020, we multiply all the final goods and services produced in 2020 by the prices of 2017.
Nominal GDP gives the misleading impression of the living standard and the economic performance of the country.
In other words, nominal GDP does not reflect the accurate economic performance of the country and the living standard of the people.
Nominal GDP is calculated by multiplying all the final goods and services produced in the current year by the respective prices of that year.
It is calculated as follows:
Nominal GDP = P_{1}Q_{1} + P_{2}Q_{2} + … + P_{n}Q_{n}
Where,
P_{1}, P_{2}, … P_{n} = Current market prices of the final products or goods and services produced
Q_{1}, Q_{2}, … Q_{n} = Quantities of the final products of goods and services produced in the current year
Real gross domestic product (Real GDP) is a part of macroeconomic.
Real GDP measures the value of economic output adjusted for price changes i.e. inflation or deflation.
This adjustment transforms the moneyvalue measure, nominal GDP, into an index for quantity of total output.
GDP is the sum of consumer spending, investment made by industry, more than or excess of exports over imports and government spending.
It is primarily useful because it closely approximates the total spending.
Due to inflation, GDP increases and does not actually reflect the true growth in an economy.
That is why the GDP must be divided by the inflation rate to get the growth of the real GDP.
Different organizations use to measure different types of Real GDP.
Real GDP is calculated by multiplying all the final goods and services produced in the current year by the respective prices of the base year.
Real GDP = P_{0}Q_{1} + P_{0}Q_{2} + … + P_{0}Q_{n}
Where,
P_{0} = Base year’s price or constant price of all the final goods or services
Q_{1}, Q_{2}, … Q_{n} = Quantities of all the final products or goods and services product in the current year
Bases 
Nominal GDP 
Real GDP 
Price 
Nominal GDP is calculated at the current market price. 
Real GDP is calculated at the constant price. 
Change 
The change in nominal GDP is due to the change in the price. 
The change in real GDP is due to the change in the output. 
Performance 
It does not reflect the actual performance of the economy. 
It reflects the actual performance of the economy. 
Calculation 
Nominal GDP = P_{1}Q_{1} + P_{2}Q_{2} + … + P_{n}Q_{n} 
Real GDP = P_{0}Q_{1} + P_{0}Q_{2} + … + P_{0}Q_{n} 
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Gross domestic product price deflator measures the changes in prices for all of the goods and services produced in an economy.
GDP price deflator helps to economists to compare the levels of real economic activity from one year to another.
GDP deflator is defined as the measure of relative changes in the current level of prices in comparison to the level of prices in the base year.
The GDP price deflator is a more comprehensive inflation measure than the CPI index because it is not based on a fixed basket of goods.
In other words, it is the ratio of national GDP in the given year to real GDP of that year multiplied by 100.
Based on GDP deflator, we can calculate the real GDP from the national GDP and the nominal GDP from the real GDP.
Nominal GDP 
= (Real GDP × GDP Deflator) ÷ 100 
Real GDP 
= (Nominal GDP ÷ GDP Deflator) × 100 
Real GDP_{ in base year} 
= Nominal GDP x (Gross GDP_{base year} ÷ Gross GDP_{current year}) 
GDP Deflator 
= (Nominal GDP ÷ Real GDP) × 100 
Where:
Nominal GDP = C + I + G + (X – M)
C = Consumption expenditure
I = Investment expenditure
G = Government expenditure
X = Total export earnings
M = Total imports expenses
X – M = Net income from abroad
The GDP deflator is also used to calculate the change in the price level or the rate of inflation in the economy.
The formula to calculate inflation by using GDP deflator is as follows:
Real of inflation = (Change in GDP Deflator ÷ GDP Deflator of the previous year) × 100
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country
Example: 1
Calculate GDP deflator when real GDP is $/₹/Rs 2,100 million and nominal GDP is $/₹/Rs 2,500 million.
Solution:
Given,
Real GDP = 2,100
Nominal GDP = 2,500
Now,
GDP Deflator 
= (Nominal GDP ÷ Real GDP) × 100 

= (2,500 ÷ 2,100) × 100 

= 119.04 
Example: 2
Calculate nominal GDP, real GDP and GDP deflator assuming base year 2018.
Year 
Price of X (in $/₹/Rs) 
Quantity of X 
2018 
60 
1,800 
2019 
62 
2,000 
Solution:
Given and working note:
P_{0} = 60 P_{1} = 62
Q_{0} = 1,800 Q_{1} = 2,000
For year 2018
The base year is 2018, the price of the base year (P_{0}) is Rs 60 and the quantity (Q_{1}) is 1,800.
Then,




Nominal GDP 
= P_{1}Q_{1} 
= 60 × 1,800 
= $/₹/Rs 108,000 
Real GDP 
= P_{0}Q_{1} 
= 60 × 2,000 
= $/₹/Rs 120,000 
For year 2019
Nominal GDP 
= P_{1}Q_{1} = 62 × 2,000 
= $/₹/Rs 124,000 
Real GDP 
= P_{0}Q_{1} = 60 × 2,000 
= $/₹/Rs 120,000 
Now
GDP Deflator 
= (Nominal GDP ÷ Real GDP) × 100 

= (124,000 ÷ 120,000) × 100 

= 119.04 
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country
Example: 3
Calculate the nominal GDP, real GDP and GDP deflator assuming base year 2018.
Year 
Price of X ($/₹/Rs) 
Quantity of X 
Price of Y ($/₹/Rs) 
Quantity of Y 
2018 
1 
100 
2 
50 
2019 
2 
150 
3 
100 
2020 
3 
200 
4 
150 
Solution:
Calculation of nominal GDP for the year 2018
= P_{1}Q_{1} + P_{2}Q_{2} + … + P_{n}Q_{n}
= P_{1}Q_{1} + P_{2}Q_{2}
= 1×100 + 2×50
= 100 + 100
= $/₹/Rs 200
Calculation of nominal GDP for the year 2019
= P_{1}Q_{1} + P_{2}Q_{2}
= 2×150 + 3×100
= 300 + 300
= $/₹/Rs 600
Calculation of nominal GDP for the year 2020
= P_{1}Q_{1} + P_{2}Q_{2}
= 3×200 + 4×150
= 600 + 600
= $/₹/Rs 1,200
Calculation of real GDP for the year 2018 (taking base year 2018)
= P_{0}Q_{1} + P_{0}Q_{2} + … + P_{0}Q_{n}
= P_{0}Q_{1} + P_{0}Q_{2}
= 1×100 + 2×50
= 100 + 100
= $/₹/Rs 200
Calculation of real GDP for year 2019 (taking base year 2018)
= P_{0}Q_{1} + P_{0}Q_{2}
= 1×150 + 2×100
= 150 + 200
= $/₹/Rs 350
Calculation of real GDP for the year 2020 (taking base year 2018)
= P_{0}Q_{1} + P_{0}Q_{2}
= 1×200 + 2×150
= 200 + 300
= $/₹/Rs 500
Calculation of GDP deflator for the year 2018
= (Nominal GDP ÷ Real GDP) x 100
= (200 ÷ 200) x 100
= 100%
Calculation of GDP deflator for the year 2019
= (Nominal GDP ÷ Real GDP) x 100
= (600 ÷ 350) x 100
= 171.43%
Calculation of GDP deflator for the year 2020
= (Nominal GDP ÷ Real GDP) x 100
= (1,200 ÷ 500) x 100
= 240%
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