India's GDP growth rose to 7.8% in Q1 FY 2023-24! But Real or Nominal?

I was reading that news on the LinkedIn news section and saw two people fighting over confusing factors

Is it a real GDP or nominal GDP? They ended up blaming the news agency to give at least some clarity.??

It made me realise that not only them but a lot of us may be confused between the two. So here is an explanation of both. But before that, let's hear out all the aspects of the news.?

According to data released by the National Statistical Office, the Gross Domestic Product (GDP) growth of India rose to 7.8% in the 1st quarter (April- June) of the financial year 2023 to 2024. The number is one year but lower than the same quarter of the previous year which was 13.5%.?

The growth is majorly driven by three factors-?

• The surge in rural demand
• Increase in service sector export activities
• Capital expenditure incurred by state and central government via projects like PM GatiShakti, the National Logistics Policy, and the Production-Linked Incentive schemes.?

We are ahead of various countries like Japan, USA, China, and Germany as you can see their Real GDP in the same quarter in comparison to India.

Coming to the real question, Is it the Real GDP or Nominal GDP??

Let’s understand it from the start-?

What is a GDP??

GDP, short for Gross Domestic Product, represents the comprehensive monetary worth of all products and services generated within a nation's borders during a one-year timeframe. "Gross" in GDP indicates that it encompasses depreciation within the assessed value of these goods and services. "Domestic" specifies that the items considered for GDP are created within the country's territorial limits.?

Moreover, the term "product" means that solely the final products and services are taken into account. The final product or service means anything ready to use by the end consumer.?

Types of GDP?

There are two types of GDP through which we calculate economic growth-?

• Real GDP
• Nominal GDP?

Well before jumping to the theoretical definition of both types of GDP, let's take a look at the Press Information Bureau (PIB) released by the government of India. {You can also check on- PressReleaseIframePage.aspx)

Both types of GDP growth rates are given at different rates. Real GDP is 7.8% and Nominal GDP is 8%.?

However, in the case of Real GDP, it's written as “at Constant (2011-12) Prices” and in the case of Nominal GDP, it’s written as “at Current Prices”?

This is where the primary differentiation lies. Let’s understand it in detail.?

What is Real GDP??

Real GDP, or Gross Domestic Product, is a measure of the total economic output of a country adjusted for inflation or deflation. It represents the value of all goods and services produced within a country's borders during a specific time period, usually a year or a quarter, and is expressed in constant, inflation-adjusted prices to provide a more accurate reflection of economic growth or contraction.?

The calculation of Real GDP is based on the base year which is 2011-12 in the case of India. It means the prices or all the products and services are taken from the base year (constant prices).?

Real GDP is used as a key indicator of a country's economic performance and is essential for analysing trends in an economy. Adjusting for inflation, allows economists and policymakers to compare economic output from one year to another and assess whether an economy is growing or shrinking in real terms.

What is Nominal GDP?

Nominal GDP, or Gross Domestic Product, is a measure of the total economic output of a country or region without adjusting for inflation or deflation. It represents the value of all goods and services produced within a country's borders during a specific time period, usually a year or a quarter, and is expressed in current market prices.

Nominal GDP reflects the current market value of goods and services, including any price changes that may have occurred due to inflation or deflation. This means that changes in nominal GDP can be influenced not only by changes in the actual quantity of goods and services produced but also by changes in their prices.

Which one is the right indicator of assessing an economy?

While nominal GDP provides a snapshot of the economy's overall production and income, it does not provide an accurate picture of real economic growth or contraction over time. This is because nominal GDP can increase simply due to rising prices, even if the quantity of goods and services produced remains unchanged or even declines.

To analyse changes in real economic output, economists typically use real GDP, which adjusts nominal GDP for inflation or deflation. Real GDP provides a more accurate measure of an economy's actual production changes over time, allowing for meaningful comparisons and assessments of economic performance.

The Ministry of Finance uses Real GDP to assess economic growth as you can see in the image (I have taken this image from the official Twitter account of the Ministry of Finance)

{Here is the link to the tweet https://twitter.com/FinMinIndia/status/1697270737835573743?s=20}

It could be the primary reason why everyone is using the term “GDP” as a synonym of the “Real GDP”

So, next time, if someone flexes their knowledge of GDP and talks about the rates and all, just ask them- Which one??