(iii) Real GDP eliminates the effect of change (rise or fall) in prices whereas Nominal GDP does not. What is the difference between GDP (Gross Domestic Product) and NDP (Net Domestic Product) What is the difference between Nominal and Real GDP? The nominal GDP is calculated using current market prices, so the changes that result only from changes in price can lead to misleading conclusions.
Continuing the above exampleReal GDP= Nominal GDP/GDP deflator × 100 = 21,000/2000= 20,000Thus, it means that the value of current year’s GDP (i.e. Therefore, Real GDP truly reflects growth of the country. Similarly positive (beneficial) impact of beautiful gardens and green parks remains outside the realm of GDE To that extent, GDP is under-estimated or over-estimated making GDP an unreliable index of welfare.In case increase in GDP is due to more production of war material like tanks, weapons, etc., it will not increase economic welfare, (w) Rate of population growth: If rate of population growth is higher than the rate of growth of real GDP (or real GNP), this will lead to fall in per capita availability of goods and services.
Welfare means sense of material well-being among the people.
Thus, Real GDP can rise only when there is rise.In physical output during a year .A country is interested in rise in physical output (or Real GDP) and not in Monetary or Nominal GDP because an increase in Real GDP leads to rise in standard of living of the people.
Difference between Gross Domestic Product at Market Price(MP) and Gross Domestic Product at Factor Cost(FC) In the previous article, we learned what GDP is and how to calculate it.
This means that Nominal GDP can increase without increase in physical output.Consequently, Nominal GDP becomes deceptive. As a result, overall welfare of the society tends to fall.Although GNP may not be a sufficient index due to above-mentioned limitations, yet it does reflect some index of economic welfare. What were the purposes of these metrics when they were first introduced and what are their uses now?
Note that GNP is the core concept of national income accounting. Thus, non-market transactions like services of housewife, exchanges or transactions through barter, enjoyment from hobbies like Painting, etc.
So, one may conclude that higher level of GDP (GNP) is an index of Greater well-being of the people.But this generalization may not be correct due correct due to following limitations or reasons:A mere rise in GDP (or GNP or National Income) may not lead in the economic welfare if its distribution results in concentration of income in the hands of very few individuals or firms.
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difference between gdp at market price and gnp at market price