Consider the following statements with respect to Nominal GDP and Real GDP 1 Real GDP measures aggre...........

Indian Economic System(CSC) Growth and development

Consider the following statements with respect to Nominal GDP and Real GDP:

1. Real GDP measures aggregate output (meaning the value of all final goods and services produced) using current prices.

2. Nominal GDP measures aggregate output using constant prices.

3. The value of nominal GDP is always greater than the value of real GDP.

Which of the statements given above is/are incorrect?

1 and 2 only

2 and 3 only

3 only

1, 2 and 3

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Explanation:

Statement 1 is incorrect. Real Gross Domestic Product refers to the measure of GDP adjusted according to the general price level, in a particular financial year. It represents the economic worth of goods and services produced, after considering inflation or deflation. Real GDP measurement is done at fixed prices, i.e. at the prices which are prevalent at some point of time in the past, known as base year price or reference price. It reflects the economic output at constant prices. Real GDP is considered as a true indicator of a country's economic growth because it exclusively considers the production and free from price changes or currency fluctuations.

Statement 2 is incorrect. Nominal Gross Domestic Product is defined as a GDP measure, expressed in absolute terms. The raw GDP data, before inflation is called Nominal GDP. It is the aggregate monetary value of the economic output produced during a particular financial year, within the nation’s border. It represents the GDP at prevailing prices in the market, i.e. the current market price.

Statement 3 is incorrect. The value of nominal GDP is generally greater than the value of real GDP because while calculating it, the figure of inflation is deducted from the total GDP. However, it is important to note that a higher Nominal GDP is not a constant. An economy going through deflation will ultimately affect the Real GDP because by adjusting for deflation, the Real GDP will be higher than the Nominal GDP because prices go down during deflation. Thus, the same economic output in two time periods will show a higher Real GDP compared to the Nominal GDP