For any business establishment be it a manufacturing company or service provider, following 4 factors are needed.
- LAND
- LABOR
- CAPITAL
- ENTREPRENEUR
Above mentioned factors are known as “Factors of production”. Therefore GDP can be categorized into 2 sections. GDP (MP) and GDP (FC).
GDP (MP) means GDP calculated on the basis of Market Price while GDP (FC) means GDP calculated on the basis of Factors affecting the final price of the product or service.
Formula is GDP(FC) = GDP(MP)-TAXES+SUBSIDIES
Coming back to main topic which is Nominal vs Real GDP. As per my last blog over “What is GDP ?” – GDP is the total sum of last values of all products and services in a country in a year. Nominal GDP is same as GDP so let’s say that a country produces product ‘A’ for a set price. Let’s assume the following data.
| Year | Price | Units(Qty) | Nominal GDP |
| 2000 | 10 | 40 | 400 |
| 2001 | 12 | 38 | 456 |
| 2002 | 20 | 30 | 600 |
Above calculated Nominal GDP is the product of Number of units of Product A and price. As can be seen from the trend over the years the GDP seems increasing. But Below table shows the actual situation by calculating the Real GDP.
| Set Base price = 10 | |||
| Year | Price | Units(Qty) | Real GDP |
| 2000 | 10 | 40 | 400 |
| 2001 | 12 | 38 | 380 |
| 2002 | 20 | 30 | 300 |
In the first table for Nominal GDP you might be seeing as GDP increasing over the years but look closely and you will find the price of products are increasing while the production is decreasing, so this is inflation. In the 2nd GDP the real GDP is calculated, which means the country has set a ‘base‘ price thus calculating the real GDP gives a clear picture of the country’s situation.
The Base price is set by CSO – Central Statistics Office. To calculate Real GDP subtract inflation from Nominal GDP. GDP deflates = (Nominal GDP/Real GDP) x 100
🙂
By Tobo.
