Macroeconomics · Lesson 2 of 9
Real, nominal and the GDP deflator
GDP in rupees rises when the economy makes more, and also when the same things simply cost more. Separating the two is the first thing any reader of the data has to do, and it is where many exam questions, especially JNU’s data tables, set their traps.
A question to hold on to
An economy’s GDP at current prices went 21, 26, 32, 39, 47 at five-year intervals from 1975 to 1995, and at constant prices 17, 21, 26, 32, 39. Nominal GDP grew more than 20% in every period. Taking the GDP deflator as the price index, in how many of the four periods did the economy have deflation?
JNU MA Economics entrance, 2012Solved at the end ↓
The idea
Two reasons GDP can rise
GDP adds up quantities times prices. So it can rise because quantities rose, which is what we care about, or because prices rose, which makes nobody better off. Nominal GDP (GDP at current prices) values each year’s output at that year’s prices and mixes the two. Real GDP (GDP at constant prices) values every year’s output at the prices of one fixed base year, so only quantities can move it.
In the base year the two are equal by construction. After it, if prices have been rising, nominal GDP is above real GDP; if prices have been falling, below.
Pause and predict
National product at current prices is higher than national product at constant prices during a period of (CUET 2020)
Interactive
Nominal and real, in a two-good economy
Two goods and three years are enough to see everything. Pick a preset, change the base year, or edit any price or quantity. Click a year to see its working.
Apples and bananas. Output doubles in 2011 at unchanged prices; in 2012 output is flat and every price doubles. Base year 2010.
Base year
| Year | Apples | Bananas | ||
|---|---|---|---|---|
| price | quantity | price | quantity | |
| Year | Nominal GDP | Real GDP | Deflator | Real growth | Inflation (deflator) | CPI |
|---|---|---|---|---|---|---|
| 2010 | 200 | 200 | 100 | – | – | 100 |
| 2011 | 400 | 400 | 100 | +100% | +0% | 100 |
| 2012 | 800 | 400 | 200 | +0% | +100% | 200 |
The working for 2011
Nominal, this year’s quantities at this year’s prices: 1 × 200 + 2 × 100 = 400
Real, this year’s quantities at 2010 prices: 1 × 200 + 2 × 100 = 400
Deflator = 100 × nominal ÷ real = 100 × 400 ÷ 400 = 100
CPI, the 2010 basket at 2011 prices: 100 × (1 × 100 + 2 × 50) ÷ (1 × 100 + 2 × 50) = 100
In the JAM 2023 preset, 2011 has twice 2010’s output at the same prices: real GDP doubles and the deflator stays at 100, so inflation is 0%. In 2012 output is unchanged and every price doubles: real GDP is flat and the deflator doubles to 200. Now move the base year to 2012 and notice that real GDP for 2010 changes but the growth rates of real GDP do not. When every price moves in proportion, the base year doesn’t matter for growth; in general it does, a little.
JNU 2011 · standard
An economy produces X and Y for consumption and Z, which is used up producing X and Y in the same year. Prices and quantities (p, q): year I, X (1, 2), Y (2, 5), Z (1, 2); year II, X (1.5, 3), Y (2, 6), Z (1.5, 4); year III, X (1.5, 6), Y (3, 6), Z (2, 5). Find GDP at current prices in year II, real GDP in year III (base year I), the deflator in year III and real growth in year III.
- Z is intermediate.It is used up within the year to make X and Y, so it is inside their value already. Leave it out.
- Year II, current prices.1.5 × 3 + 2 × 6 = 16.5.
- Year III at year I prices.1 × 6 + 2 × 6 = 18. Nominal year III: 1.5 × 6 + 3 × 6 = 27, so the deflator is 27/18 × 100 = 150.
- Real growth in year III.Year II at year I prices: 1 × 3 + 2 × 6 = 15. Growth: 18/15 − 1 = 20%.
Answer
16.5, 18, 150 and 20%. Counting Z would give 22.5 for year II, which is an option.
The price index
The deflator, and growth that adds up
GDP deflator
Often quoted with the × 100 dropped, as a ratio: 1.7 rather than 170.
It is called implicit because nobody prices a basket to build it: it falls out of the two GDP series. Rearranged, nominal GDP = real GDP × deflator. JNU 2010: real GDP 1,000 and deflator 110 means nominal GDP 1,100.
Taking growth rates of both sides of nominal = real × price gives a rule you will use constantly:
Growth of a product
g is a growth rate, π inflation. The approximation is good when the rates are small.
The same works for anything built by multiplying. Real GDP = real GDP per head × population, so nominal GDP = real GDP per head × population × price level.
Pause and predict
Real GDP per head rose 50% over a decade and population rose 20%. Prices never fell in any year. What is the least nominal GDP could have grown? (JNU 2017)
Pause and predict
A country's nominal GDP is constant. Which is correct? (JNU 2015)
Two indices
The deflator and the CPI are different baskets
The consumer price index answers a different question: what does a fixed basket of things households buy cost now, compared with the base year?
| GDP deflator | Consumer price index | |
|---|---|---|
| Covers | Everything produced at home: consumer goods, investment goods, government purchases, exports | What households consume, including imported goods |
| Basket | This year’s quantities (a Paasche index) | The base year’s quantities (a Laspeyres index) |
| When buyers switch to cheaper goods | Picks the switch up | Misses it, so tends to overstate the rise in the cost of living |
IIT JAM 2025 asked for the first row: the CPI includes goods consumed rather than goods produced. Open the “Buyers switch goods” preset in the lab: coffee triples in price, people move to tea, and by year 3 the CPI reads 200 while the deflator reads 140.
Drill
Stocks and flows
A flow is measured per unit of time; a stock at a point in time. Water flowing into a tank per minute is a flow; the water in the tank is a stock. Hyderabad asked “which of these is a stock?” in 2010, 2011 and 2015, and JNU twice asked about the one that is neither.
Stock or flow? · 1 of 10
Gross domestic productHyderabad 2010, 2011, 2015
Using GDP
Comparing countries and people
Per head. A big country has a big GDP. Living standards are usually compared with real GDP per capita (Hyderabad 2011).
Prices differ across countries. Converting at market exchange rates undervalues poorer countries, where services and non-traded goods are cheap. Purchasing power parity (PPP) conversion prices everyone’s output at common prices.
Non-market work differs too. GDP leaves out unpaid household work and much of the informal economy, which are larger in developing economies. So even real GDP understates their income by omitting non-market transactions (JNU 2018). Comparisons are most accurate when both prices and the value of non-market activity are the same across countries (Hyderabad 2019 and 2020).
Income is not wealth. Two countries with the same GDP and population have the same GDP per head, but not necessarily the same wealth (a stock) or the same productivity per worker (it depends on how many work). JNU 2015 made that its answer: none of the three need hold.
Data
Reading a national accounts table
JNU often gives a real CSO or NSO table with cells blanked out and asks four to seven questions on it. Every one of them is the expenditure identity or a ratio, applied carefully. The 2014 paper used the January 2014 press note, in ₹100 billion; its bottom row, expenditure on GDP, was replaced by letters.
JNU 2014 · foundation and standard
At current prices in 2012–13: final consumption 696, gross fixed capital formation 307, change in stocks 17, valuables 27, exports 243, imports 311, discrepancies 32. Find D, the expenditure on GDP. Then use the constant-price table to find growth in 2012–13, and the deflator.
- Current-price GDP.696 + 307 + 17 + 27 + 243 − 311 + 32 = 1011. Valuables and discrepancies are rows of the table, so they are in.
- Constant-price GDP, both years.2011–12: 400 + 199 + 12 + 13 + 138 − 187 − 12 = 563. 2012–13: 421 + 200 + 11 + 18 + 145 − 199 − 6 = 590.
- Growth.590 ÷ 563 − 1 = 4.8%. The options were 12.25%, 10.91%, 6.50% and 4.74%: the key picks the nearest, 4.74%.
- Deflator.1011 ÷ 590 = 1.714, so 1.7.
Answer
D = 1011, growth about 4.8% (key 4.74%), deflator 1.7. The table’s rounded figures don’t reproduce the key’s growth exactly, so in table questions pick the option nearest your answer. The same happens in its next question: growth fell from 10.6% in 2010–11 to 4.8%, a drop of 5.9 points, keyed as 5.5.
Two more from the same table. The private consumption to GDP ratio at current prices in 2011–12 is 514 ÷ 902 = 57.0%. And for the investment rate excluding valuables in 2012–13 at constant prices, gross fixed capital formation alone gives 200 ÷ 590 = 33.9%; adding the change in stocks gives 35.8%. Either way the only option in range is 34%.
JNU 2016 · foundation and standard
At constant 2011–12 prices, 2014–15: GVA at basic prices 97,27,490, taxes on products 11,08,339, subsidies on products 2,83,679. Find GDP (A). In 2015–16 GDP is 1,13,50,962, taxes 11,93,486 and subsidies 2,80,102. Find GVA (B) and the growth of GVA and of GDP.
- The identity since 2015.GDP = GVA at basic prices + product taxes − product subsidies.
- A.97,27,490 + 11,08,339 − 2,83,679 = 1,05,52,150.
- B.1,13,50,962 − 11,93,486 + 2,80,102 = 1,04,37,578.
- Growth.GVA: 1,04,37,578 ÷ 97,27,490 − 1 = 7.3%. GDP: 1,13,50,962 ÷ 1,05,52,150 − 1 = 7.6%.
Answer
A = ₹1,05,52,150 crore, B = ₹1,04,37,578 crore, GVA growth 7.3% and GDP growth 7.6%.
When the table cannot tell you
JNU 2015 blanked a cell of indirect taxes in a year where the row that would pin it down (NNP at market prices) was also blank. The answer was “cannot be determined from the given data”. Before computing, check that the identity you want has only one unknown.
JNU 2014 · standard
GDP was ₹100 at current prices in 2012–13 and ₹90 in 2011–12. At constant 2004–05 prices it was ₹59 and ₹56.1. What was 2011–12’s GDP at 2012–13 prices?
- Real growth is the same whichever base you use here.59 ÷ 56.1: output grew by 5.17%.
- Rebase.At 2012–13 prices, 2012–13 GDP is 100. So 2011–12 is 100 × 56.1 ÷ 59 = 95.08.
Answer
₹95.1. The tempting ₹90 is 2011–12 at its own prices.
Solving the opening question
The opening question, solved
| Year | Nominal | Real | Deflator | Change in the deflator |
|---|---|---|---|---|
| 1975 | 21 | 17 | 123.5 | |
| 1980 | 26 | 21 | 123.8 | up 0.2% |
| 1985 | 32 | 26 | 123.1 | down 0.6% |
| 1990 | 39 | 32 | 121.9 | down 1.0% |
| 1995 | 47 | 39 | 120.5 | down 1.1% |
Nominal GDP grew fast in every period, but real GDP grew almost as fast. The deflator rose only between 1975 and 1980 and fell in each of the three later periods. So there was deflation in 3 periods and inflation in 1, which were the answers to both of JNU’s questions. Growing nominal GDP says nothing on its own about prices.
Watch out for
The mistakes examiners are fishing for
- Reading nominal growth as inflation, or as real growth. It is (roughly) the sum of the two. Split it with the deflator.
- Counting intermediate goods in a data question. A good “used up in producing” others is intermediate (JNU 2011’s Z).
- Adding growth rates that multiply. 50% and 20% make 80%, not 70%. Use (1 + a)(1 + b).
- Confusing the deflator and the CPI. Produced at home and current quantities versus consumed and a fixed basket.
- Hunting for an exact match in rounded tables. Pick the nearest option once your working is right.
Revise
The lesson on one screen
The lesson on one screen
- Nominal GDP
- This year's quantities at this year's prices (current prices).
- Real GDP
- This year's quantities at base-year prices (constant prices). Only quantities move it.
- GDP deflator
- Nominal ÷ real × 100. Equals 100 in the base year. Covers everything produced at home, current basket.
- CPI
- Cost of a fixed base-year consumer basket. Includes imports; misses substitution.
- Growth
- (1 + nominal growth) = (1 + real growth)(1 + inflation); so nominal ≈ real + inflation.
- Stocks and flows
- Flows per period (GDP, investment, deficit); stocks at a date (money supply, capital, debt). Interest rate: flow ÷ stock.
- Comparisons
- Use real GDP per head at PPP; remember non-market work is left out.
- Tables
- Apply the identity; check there is only one unknown; pick the nearest option.
Practice
Check yourself
Compute
Nominal from real
Real GDP is 2,000 and the GDP deflator is 125. What is nominal GDP?
Real growth
Nominal GDP rises from 500 to 594 while the deflator rises from 100 to 110. By what percentage did real GDP grow?
Three growth rates
Over some years, real GDP per head rose 20%, population 10% and the price level 25%. By what percentage did nominal GDP rise?
A deflator
Base year: 10 pens at ₹5 and 4 books at ₹50. This year: 12 pens at ₹6 and 5 books at ₹55. Find this year’s GDP deflator (base year = 100).
Quick questions
1Nominal GDP rose 8% and the GDP deflator 5%. Real GDP rose by about
2Unlike the CPI, the GDP deflator
3Which of these is a stock?
4If nominal GDP equals real GDP in some year, the GDP deflator (as a ratio) in that year is
Real questions
Past papers, by level
Foundation
Definitions and one-step problems. Most CUET, UGC NET and Hyderabad questions sit here.
21 questionsPractise →
Standard
Two or three steps and data tables, up to the hardest JNU, JAM and GATE questions.
33 questionsPractise →
All 54 past-paper questions for this lesson, easiest first: practise the full set →
These are questions from the TestStop bank. A free account answers 10 a day, each with its worked solution; All-Access opens every set with no daily limit.
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