Ordinarily, GDP is defined as the sum total of money value of all final goods and services produced in an economy during a year.

Factor inputs produce a flow of goods and services. These goods and services are measured in their physical units, like liters, tones, meters, etc.

We can convert these measurements in physical units in money terms. For this purpose, we need to multiply each output by its respective price.

Thus, if the price of a shirt is Rs. 100. and 5, 000 shirts have been produced in an economy during a period of one year, we can say that the total output of shirts in the economy was of the value of Rs. (100 x 5, 000) =  Rs. 5,00,000.

Similarly, the money value of al final goods and services produced in an economic during a year can be estimated.

The sum total of these money values is what we call GDP.

Nominal GDP and Real GDP

Nominal GDP is also known as GDP at current prices.

Real GDP is also known as GDP at constant prices.

Distinction between the two concepts is based on the fact that as to which set of prices are made use of to estimate the money value of output.

Two different sets of prices are always available to estimate the money value of any output.

One set of prices is the current prices. Fore example, if we want to estimate the money value of output during the year 2008-09. GDP estimated with the help of these GDP or GDP at current prices.

Alternatively, to find the money value of all goods and services produced in the year 2008-09, we make use of the prices fo each of these goods and services as they prevailed in some past year, say 1999-2000. GDP of 2008-09 estimated with the help of 1999-2000 prices will be called real GDP, or GDP at constant prices. To measure the economic growth of a nation, we make use of the concept of real GDP.

Real GDP is not affected by changes in prices. It measures only changes in production of goods and services.

It is the increased availability of goods and services which reflects economic growth. And, hence, real GDP is the true measure of economic growth.

Thus, if real GDP of India increased by 8 per cent during 2008-09, we can also that the rate of growth fo the Indian economy during the year 2008-09 was 8 per cent.

The rate of increase of real GDP is estimated as follows:

R_Y = Y₁ - Y₀  X 100
              Y₀

where            R_Y = Rate of increase of real GDP
                       Y₁ = Real GDP in the current year
                       Y₀ = Real GDP in the preceding year

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