Nominal and real GDP; price indices

GDP can rise because more is produced, or just because prices went up. To tell them apart:

• Nominal GDP values output at current prices.
• Real GDP values output at constant prices of a base year.

Example: an economy makes only pens. In the base year, pens cost ₹5; this year it makes 200 pens at ₹8. Nominal GDP = 200 × 8 = ₹1,600; real GDP = 200 × 5 = ₹1,000.

The GDP deflator = nominal GDP ÷ real GDP = 1,600 ÷ 1,000 = 1.6 (or 160%): prices have risen by 60%. A deflator below 1 (or 100%) means prices fell.

Other price indices:

• Consumer Price Index (CPI): the cost of a fixed basket of goods bought by a typical consumer now, divided by its cost in the base year, × 100. If a basket cost ₹800 then and ₹1,000 now, CPI = 125.
• Wholesale Price Index (WPI): the same idea with wholesale prices. (In the USA it is called the producer price index.)

The CPI differs from the GDP deflator: it covers fewer goods (only what consumers buy), it includes imported goods (the deflator covers only domestic output), and its basket has fixed weights.