Nominal GDP, Real GDP and GDP Deflator

Nominal GDP values current production at current-year prices, while real GDP values it at base-year prices. The GDP deflator is an implicit price index that captures the overall price change between these two measures and allows GDP at current prices to be converted into GDP at constant prices.

Conversion formula

The GDP deflator is defined as GDP deflator = (Nominal GDP / Real GDP) × 100. Rearranging it gives Real GDP = Nominal GDP × 100 / GDP deflator; thus, nominal GDP is divided by the price index expressed relative to 100 to remove the effect of price changes.

• If nominal GDP is ₹220 lakh crore and the GDP deflator is 110, real GDP is ₹200 lakh crore.
• The reverse conversion is Nominal GDP = Real GDP × (GDP deflator / 100).
• In the base year, the deflator is 100, so nominal GDP and real GDP are equal by construction.

Economic interpretation

The conversion separates changes in the volume of production from changes in prices. Nominal GDP can rise because output increases, prices increase, or both; real GDP measures the output change after adjusting for the price effect.

• A deflator above 100 indicates that the overall price level of domestically produced final goods and services is higher than in the base year.
• Unlike a fixed-basket consumer price index, the GDP deflator reflects the changing composition of all final goods and services included in domestic GDP.

Relevance for government budgeting

Budgetary aggregates such as revenue, expenditure and fiscal deficit are recorded in current rupees, so their ratios are generally assessed against nominal GDP. Changes in both real growth and the GDP deflator affect the nominal GDP denominator and can therefore alter fiscal ratios.