GDP measures the total value of goods and services produced in an economy over a period of time. There are rules for computing GDP, such as only including the value of final goods and services and using imputed values for non-market goods and services. GDP can be measured nominally, using current prices, or realistically, using fixed base year prices to adjust for inflation. Real GDP is a better measure of economic activity as it accounts for changes in quantity rather than just price level changes. The GDP deflator shows the inflation rate by dividing nominal GDP by real GDP.

1. GDP
Rules for computing
GDP
Nominal v/s Real GDP
Which is Better?
GDP Deflator
GDP :
.

2. GDP :
It measures how an economy is preforming.
GDP is the market value of all final Goods and Services
produced within an economy in a given period of time.
There are two ways to view GDP:
1. Total income of everyone in the economy.
2. Total Expenditure on the economy’s output of goods and
services.

3. Rule For Computing GDP:
Case of Re-used Items:
 GDP only measures the values of currently produced
goods and services.
Ex: Sale of an old car, is just transfer of an asset, not an
addition to the economy.

4. Case of Intermediate Goods:
 GDP only measures value of final good.
Ex: If woodworker gets wood at 7$ and sell chair at 15$.
Then only 15$ is included in GDP.
The value of intermediate good is already included as part
of market price of final good.

5. Case of Non-Marketed Goods
and Services
 Some goods don’t have market, and to
compute price of those we use estimate of
their value. This is called imputed value.
 Ex: You own a house, you are enjoying
services without paying money. To compute
these free of cost services, Govt. estimate the
rent of house( if rented) then include this
imputed rent as part of GDP.

6. Nominal v/s Real GDP
Nominal GDP
 The value of goods and
services measured at
current prices is called
Nominal GDP.
Real GDP
 The value of goods and
services measured at
constant set of prices is
called Real GDP.

7. Method to measure Real GDP
 In Real GDP, you select a base-year price, and then
add current year Quantities to value goods in different
years.
 Ex: Base-year= 2015 Prices
Real GDP for 2015 = ( 2015 Price of Apple*2015 Quantity
of Apple) + ( 2015 Price of Banana * 2015 Quantity of
Banana)
Real GDP for 2016 = ( 2015 Price of Apple*2016 Quantity
of Apple) + ( 2015 Price of Banana * 2016 Quantity of
Banana)
And so on……

8. Which one is better?
 Nominal GDP is misleading . How?
If all prices doubled without any change in quantity,
then Nominal GDP would also double.
 Because in Real GDP, prices are held constant,
and quantities do vary, therefore Real GDP varies
from year to year .
 In real world, economic satisfaction of a society
depends upon quantity of goods and services
produced, so Real GDP is a better measure.

9. GDP Deflator
 It shows us what’s happening to the level
overall level of prices in the economy.
 GDP Deflator = Nominal GDP
 Real GDP
 Nominal GDP = Real GDP* Nominal GDP
 Real GDP = Nominal GDP/ GDP Deflator