The given statement is correct. Real Gross Domestic Product (GDP) is a better indicator of economic growth than Nominal Gross Domestic Product (GDP) as it is not affected by changes in general price level.
Numerical Example:
| Goods |
Price of Current Year (P1) (in ₹) |
Price of Base Year (P0) (in ₹) |
Quantity of Current Year (Q1) (in units) |
Nominal GDP (P1Q1) |
Real GDP (P0Q1) |
| A |
20 |
10 |
100 |
2,000 |
1,000 |
| B |
10 |
5 |
200 |
2,000 |
1,000 |
| C |
30 |
20 |
50 |
1,500 |
1,000 |
|
|
|
|
∑P1Q1 =5,500 |
∑P0Q1 =3,000 |
In the above example the difference between Real GDP (∑P0Q1) and Nominal GDP (∑P1Q1) is 5,500-3,000 = ₹2,500. This is only the monetary difference as the quantity sold in the market remains unchanged and the variation in the value of GDP is merely due to the change in the prices in the economy.
