GDP and Welfare

2. GDP and Welfare
Grade XII
Economics

3. Learning Objective
• To apply the formula for calculating GDP deflator
• To comprehend the concepts of real and nominal GDP
• To understand the relation between GDP and Welfare

4. Current Prices and Constant Prices
• Current prices refer to the prevailing prices.(2020 prices)
• Constant prices refer to a base year prices.(2012 prices or
prices of any other past year.

5. Nominal GDP
• GDP at current prices is the market value of all the final goods and
services produced within the domestic territory of a country during
an accounting year, estimated using current prices.
• Nominal GDP = Q x P
• GDP can increase when there is increase in either Q or P.
• If it is increasing due to increase in Q, it is real increase.
• If it increases due to increase in P, it is only monetary increase in
GDP.
• Nominal GDP = Real GDP ×
𝑷𝒓𝒊𝒄𝒆 𝑰𝒏𝒅𝒆𝒙
𝟏𝟎𝟎

6. Real GDP
•GDP at constant prices is the market value of all the
final goods and services produced within the
domestic territory of a country during an accounting
year, estimated using base year prices.
•It increases only when quantity increases.
Real GDP= Nominal GDP ×
𝟏𝟎𝟎
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑷𝒓𝒊𝒄𝒆 𝑰𝒏𝒅𝒆𝒙

7. • It is the ratio of nominal GDP to real GDP.
• GDP Deflator =
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷
× 100
• The GDP deflator is a measure of inflation. This ratio shows the
extent to which the increase in gross domestic product has
happened on account of higher prices rather than increase in
output. It shows the percentage change in prices.
• Real GDP=
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
𝑮𝑫𝑷 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓
• Nominal GDP= Real GDP × GDP Deflator
GDP Deflator

8. Calculation
1. If real GDP is ₹ 18,000 crores and Real GDP is
₹ 12,000 crores calculate GDP deflator.
2. If nominal GDP is ₹ 840 crores and GDP
deflator is
𝟕
𝟓
calculate real GDP.

9. Solution
1.GDP Deflator=Nominal GDP/ Real GDP
= 1800/1200
= 150%
2. Real GDP =
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
𝑮𝑫𝑷 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓
=
𝟖𝟒𝟎
𝟕
𝟓
=840 ×
𝟕
𝟓
= 600

10. Limitations of GDP as an Index of Welfare
•GDP may not be uniformly distributed among
different sections of the society.
•Non-market transactions are not included in GDP.
•Negative and positive externalities are not included in
the estimation of GDP.
•GDP may rise due to rise in prices.
•Population growth reduces per capita GDP.

11. Review
• What is GDP deflator?
• Distinguish between nominal and real GDP.
• Explain limitations of GDP as an indicator of welfare.

12. Recapitulation
• GDP at current prices is the market value of all the final goods and
services produced within the domestic territory of a country during
an accounting year, estimated using current prices.
• GDP at constant prices is the market value of all the final goods and
services produced within the domestic territory of a country during
an accounting year, estimated using base year prices.
• The GDP deflator is a measure of inflation. This ratio shows the extent
to which the increase in gross domestic product has happened on
account of higher prices rather than increase in output.
• GDP is not an indicator of welfare.