Nominal and real GNP

A presentation on nominal and real GNP

1. NOMINAL AND REAL GNP Rajbardhan singh B.A.LL.B. (H) [email protected]

2. Table of Content Concept of Gross National Product (GNP) Merits of Gross National Product (GNP) Demerits of Gross Domestic Product (GNP) Meaning of Nominal GNP Meaning of Real GNP How to calculate Real GNP Difference Between Nominal & Real GNP GNP Deflator How to calculate GNP Deflator Conclusion

3. Concept of Gross National Product(GNP) Gross National Product is a total is the total value of goods and services produced in a year at the marked price. While calculating GNP, the following precautions must be taken : ( i ) Double counting must be avoided. (ii) Adjustment must be made for price changes taking the index number of prices. (iii) The value of inventories should be added. Inventories are stocks of raw materials and intermediary goods at the end of the year. (iv) Adjustment should be made regarding net foreign income.

4. CONTINUED- If the exports are more than imports, the difference must be added. If the imports are more than exports, the difference must be deducted. Therefore, GNP = Consumer goods + Producer goods + Changes in inventories + Net foreign income. If we calculate GNP from expenditure side, GNP = Personal consumption expenditure (C) + Gross private domestic investment (I) + Government expenditure (G) + Net foreign expenditure (IF). Therefore, GNP = C + I + G + IF

5. Merits of Gross National Product (GNP) Gross National Product has the following merits : ( i ) It is a good index of the conditions of production and employment in a country in a given period. (ii) It avoids the statistical difficulties of calculating depreciation and replacement. (iii) It gives an idea of total employment as a function of total production .

6. Demerits of Gross National Product (GNP) Gross National Product has the following demerits : ( i ) It does not give an accurate idea of the achievements of the economy because it shows gross national product. (ii) It gives only a general idea of the performance of the economy. (iii) The GNP does not reveal additions to production.

7. Meaning of Nominal GNP GNP measured at current prices is called nominal GNP. Nominal GNP measures GNP at the prices prevailing, when income was earned. Nominal GNP (Gross National Product) reflects an economy’s production in current prices, unadjusted for inflation .  It does not indicate real growth of National Income (N.I.). Changes in Nominal Income may be occur due to following two reasons : ( i ) Increase in Output (ii) Increase in Price

8. Meaning of Real GNP GNP measured at constant prices is called Real GNP. Real GNP adjusts for inflation and reflects an economy’s production in constant prices.  Central Statistical Organization (CSO) calculates the GNP at constant and Current prices. Actual growth of National Income due to increase in output is indicated by real GNP. CSO considers year 2011-2012 as the base year for calculating real GNP.

9. How to calculate Real GNP Real GNP = Nominal GNP GNP deflator Or, Real GNP = Nominal GNP price index number of a year /100 Suppose, nominal GNP in 2008 was Rs. 750 crore and price index was 125. The real GNP for 2008 was Real GNP = Rs. 750 crore = Rs. 600 crore 125/100

10. Difference Between Nominal and Real GNP Nominal GNP is measured at current prices. Since this aggregate measures the value of goods and services at current year prices GNP will change when volume of product changes or price changes or when both changes. Real GNP is computed at the constant prices. Under real GNP value is expressed in terms of prices prevailing in the base year. This measure takes only quantity changes. Real GNP is the indicator of real income level in the economy. Nominal GDP is the sum-total of the economic output produced in a year valued at the current market price while Real GDP is the sum-total of the economic output produced in a year values at a predetermined base market price.

11. CONTINUED-   For example, if you produce 2 oranges this year and they are worth Rs. 100, your Nominal GNP is Rs. 200. Next year, if you still produce two oranges, but they are worth Rs. 120, your Nominal GNP is Rs. 240 (+20%), but your Real GNP is still Rs. 200, because you keep the prices steady.

12. GNP Deflator The GNP deflator is a price index that is used to adjust GNP for inflation.  It is important to do this because you need to adjust for inflation to calculate real GNP.  Real GNP is GNP adjusted for inflation. GNP (Gross National Product) is a measure of national income.  It is the market value of all goods and services created in a given year by labor and property that belong to the citizens of a given country.  This measure is similar to, but not the same as, GDP.  One main reason for using GNP is to know how big our country’s economy is.  But changes in GNP do not necessarily mean that our economy is growing.  GNP does not measure how many goods and services are being produced.  Instead, it measures how much the goods and services that are produced cost. 

13. CONTINUED- This means that we could make the exact same number of goods and services this year as we did last year but we could still see GNP rise if the prices of the goods and services rose.  It would look like the economy was growing because GNP rose, but in reality, the only thing that happened was an increase in prices (inflation). To avoid this problem, we use the GNP deflator.  It shows how much prices have risen since a base year.  We use it to adjust the GNP (technically, this is “nominal GNP”) for inflation.   Once we have done this, we have real GNP, which shows what our GNP is when adjusted for inflation.

14. How to calculate GNP Deflator The GNP deflator is calculated with the following formula: GNP Deflator = Nominal GNP X 100 Real GNP For Example : The value of the nominal GNP of an economy was Rs. 2,500 crores in a particular year. The value of GNP of that country during the same year, evaluated at the prices of some base year, was Rs. 3,000 crores . Calculate the value of the GNP deflator of the year in percentage terms. Has the price level risen between the base year and the year under consideration? 

15. CONTINUED- Answer : GNP Deflator = Nominal GNP X 100 Real GNP = 2,500 x 100 = 0.83 3,000 GNP deflator of 0.83 or 83% indicates that the price level has reduced by 17% between the base year arm the year under consideration.

16. CONCLUSION The nominal GNP, or Gross national product, is that the nominal GNP is calculated at the current price levels of the economy, and the real GNP is calculated relative to a set base year. Nominal GNP is typically used to compare current economies at current price levels, and real GNP can be used to evaluate a single economy's history. GNP is a measure of the economic output of an economy. Real and nominal GNP are both used for comparisons between different economies, but they approach the comparison in different ways. When looking at trends using the real GNP, you can examine the measure of output without needing to worry about the influence of prices. If prices rise, then the nominal GNP will look like it increases even if it doesn't actually increase. This is because the total output in price will increase. Real GNP, therefore, can help adjust for inflation and rising costs while still providing an accurate measure of the total economic output. Real GNP can be used for measuring economic output in terms of goods and services, while nominal GNP can be used to measure output in terms of money value.

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