Inflation can distort economic variables like GDP, so we have two versions of GDP: One is corrected for inflation, the other is not.
- Nominal GDP values output using current prices. It is not corrected for inflation.
- Real GDP values output using the prices of a base year. Real GDP is corrected for inflation.
Real GDP
- Real GDP helps in determining the effect of increased production of goods and services as it is affected by change in physical output only. On the other hand, Nominal GDP can increase even without any increase in physical output as it is affected by change in prices also.
- Real GDP is a better measure to make periodic comparison in the physical output of goods and services over different years.
- Real GDP facilitates international comparison of economic performance across the countries.
What is Base Year?
A base year is the year used for comparison in the measure of a business activity or economic index. In the base year all the economic activities are equated to 100 percent based on the market price of those activities in that year. Under that 100%, each activity is given a certain percentage based on the importance of that activity in terms of contribution to GDP.
Why to change base year regularly
Take the example, suppose India’s GDP is Rs. 1000 and base year is 2000. Now, in 2015, many sectors such as IT, e-commerce, mobile telephony etc contributes to our economy, which were not present in 2000.
Thus, India might be showing wrong GDP figures, since majority of economic activities driving sectors are not represented in Rs. 1000. So, our govt. decides to change the base year to 2010. The revised base year will lead to all such sectors coming into play, and the GDP number will increase as the total output from these sectors will be added, which was not the case in 2000 base year.
Who advises the changing the Base Year
The National Statistical Commission, which had advised to revise the base year of all economic indices every five years. The new base year has been selected in line with the latest quinquennial round of employment-unemployment survey.
What are constant prices and current prices?
The estimates at the prevailing prices of the current year are termed as “current prices”, while those prepared at the base year are termed as “constant prices” or “base year prices”.