Real Vs Nominal GDP

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This article brings out a very interesting topic, which is explained below

• Fiscal deficit at 5.1%
• The fall in deficit is mainly because of inflation
• Fiscal deficit is calculated as percentage of nominal GDP ie GDP at market prices
• But if we take fiscal deficit as % of real GDP or GDP at factor cost then it comes upto to 5.8%
• WHAT IS Real GDP and Nominal GDP?

• Suppose a country only produces bread.In the year 2000 it had produced 100 units of bread, price was Rs 10 per bread.GDP at current price was Rs 1,000. In 2001 the same country produced110 units of bread at price Rs 15 per bread. Therefore nominal GDP in 2001was Rs 1,650 (=110 × Rs 15). Real GDP in 2001 calculated at the price of the year 2000 (2000 will be called the base year) will be 110 × Rs 10 = Rs 1,100.

• Hence Nominal GDP doesn’t truly reflect the increase in production capacity of an economy

• Note: GDP growth is in terms of % of real GDP
• Ratio of nominal to real GDP gives the GDP deflator
• Capital formation in agri sector has stagnated since 2005-06 at 7.5% of total capital formation in economy
• There has been a decline in direct tax collections and an increase in indirect tax collections
• Excise revenue to GDP has reduced from 3% in 2005-06 to 1.7%
• Customs to GDP has reduced from 1.8 to 1.5% in same period