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Gross Domestic Product

Ordinarily, GDP is defined as the sum total of money value of all final goods and services produced in an economy during a year.

Factor inputs produce a flow of goods and services. These goods and services are measured in their physical units, like liters, tonnes, meters, etc.

We can convert these measurements in physical units in money terms. For this purpose, we need to multiply each output by its respective price.

Nominal GDP and Real GDP

Nominal GDP is also known as GDP at current prices.

Real GDP is also known as GDP at constant prices.

Distinction between the two concepts is based on the fact that as to which set of prices are made use of estimate the money value of output.

Real GDP is not affected by changes in prices. It measures only changes in production of goods and services.

It is the increased availability of goods and services which reflects economic growth. And, hence, real GDP is the true measure of economic growth.

Thus, if real GDP of India increased by 8 per cent during 2008-09, we can also say that the rate of growth of the Indian economy during the year 2008-09 was 8 per cent.

The rate of increase of real GDP is estimated as follows:

where, R_Y = Rate of increase of real GDP

Y₁ = Real GDP in the current tear

Y₀ = Real GDP in the preceding year

Real per capita GDP

Real per capita GDP is derived from real GDP as a simple average as follows:

Real per capital GDP indicates the average availability of goods and services per person during a year. An increase in real per capital GDP therefore would be indicative of improving standards of living.