A presentation on nominal and real GNP

1. NOMINAL AND REAL GNP
Rajbardhan singh
B.A.LL.B. (H)
sikarwarrajthakur@gmail.com

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,

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

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

17. THANK YOU