Business Economics · Determination of National Income

Real vs Nominal GDP and Price Indices (CA Foundation Business Economics)

Updated 1 October 2026 · Fact-checked

Nominal GDP values output at current-year prices. Real GDP values output at base-year (constant) prices, so it removes inflation. The GDP deflator = (Nominal GDP ÷ Real GDP) × 100. To find real GDP, divide nominal GDP by the deflator and multiply by 100. Per capita income = national income ÷ population.

Understand Real vs Nominal GDP and Price Indices

GDP is the market value of all final goods and services produced inside a country in a year. The word "value" is the problem. Value is price × quantity. If prices rise, GDP rises even when the country produces nothing extra.

Nominal GDP (GDP at current prices) uses the prices of the year you are measuring. It can grow because output grew, because prices grew, or both. So it can mislead you about real growth.

Real GDP (GDP at constant prices) values every year's output at the prices of one fixed base year. Prices are held still, so only changes in quantity show up. Use real GDP to measure economic growth. In the base year, nominal GDP and real GDP are equal and the deflator is 100.

The GDP deflator is a price index that covers all goods and services in the economy. It is the ratio of nominal to real GDP, times 100. A deflator of 125 means prices are 25% higher than in the base year. The percentage change in the deflator between two years gives the inflation rate. Unlike CPI, the deflator is not based on a fixed basket. Its weights change with what the economy actually produces, and it includes goods bought by firms and government, and exports. It excludes imports.

Per capita income is national income divided by population. It shows the average income per person. Real per capita income is the better guide to living standards over time. GDP is still a weak welfare measure. It ignores income distribution, unpaid work such as housework, the underground economy, environmental damage, leisure and quality of life. Higher GDP does not always mean higher well-being.

Key formulas to remember

GDP deflator: GDP deflator = (Nominal GDP ÷ Real GDP) × 100; Base year value is 100. Nominal GDP uses current prices, real GDP uses base-year prices.
Real GDP: Real GDP = (Nominal GDP ÷ GDP deflator) × 100; Rearranged form of the deflator. Use it to strip out inflation.
Nominal GDP: Nominal GDP = (Real GDP × GDP deflator) ÷ 100; Use when real GDP and the deflator are given.
Inflation from deflator: Inflation rate (%) = [(Deflator this year − Deflator last year) ÷ Deflator last year] × 100; Divide by last year's deflator, not this year's.
Real growth rate: Growth (%) = [(Real GDP this year − Real GDP last year) ÷ Real GDP last year] × 100; Always use real GDP to measure growth.
Per capita income: Per capita income = National income ÷ Population; Real per capita income uses real national income.

How to solve Real vs Nominal GDP and Price Indices questions

Use this order for any question on nominal GDP, real GDP, the deflator or per capita income.

1Identify what is given: nominal GDP, real GDP, deflator, or prices and quantities.
2Identify what is asked: real GDP, deflator, inflation, growth or per capita income.
3If you have prices and quantities, compute nominal GDP as Σ(current price × quantity) and real GDP as Σ(base price × quantity).
4Pick the matching formula from the list and rearrange it before putting in numbers.
5Keep units consistent. Check if figures are in ₹ crore, ₹ lakh crore or plain ₹, and check the population units.
6Compute carefully, then check whether the answer makes sense. If prices rose, real GDP should be below nominal GDP.
7For growth or inflation, take the percentage change on the earlier year's figure.

Quickest way: Sense-check and eliminate

When to use it: Use this on numerical MCQs when time is short. It often removes two options in seconds.

Compare the deflator with 100. Above 100 means real GDP is less than nominal. Below 100 means real GDP is more than nominal.
Use this to cross out options that go the wrong way.
For real GDP, divide nominal GDP by the deflator, then shift the decimal by two places for the ×100. Round to check the remaining options.
For percentage growth, think in ratios first. A rise from 200 to 230 is 30 on 200, which is 15%.
If a question needs several steps and the options are close, skip it and return later. Wrong answers cost 0.25 marks.

Common mistakes in Real vs Nominal GDP and Price Indices

Using nominal GDP to claim economic growth.
Nominal GDP is the number you see in the news, so it feels like the main one.
Fix: Growth means more output. Use real GDP for growth. Nominal GDP also moves with prices.
Writing the deflator as Real ÷ Nominal.
Students memorise the formula without knowing which GDP is on top.
Fix: Remember the deflator is above 100 when prices rise, so nominal (the larger figure) goes on top.
Forgetting the ×100 when finding real GDP.
The deflator is written as an index like 125, but it works as 1.25 in calculation.
Fix: Real GDP = Nominal ÷ Deflator × 100. A real value larger than nominal when the deflator is above 100 shows an error.
Calculating inflation as a percentage of the current year's deflator.
Students divide by the larger or latest number.
Fix: Percentage change always divides by the earlier (base) figure.
Treating a higher per capita income as proof of better welfare for everyone.
An average hides how income is spread.
Fix: Per capita income is an average. It ignores inequality, non-market work and environmental cost, so it is only a rough welfare guide.
Saying the GDP deflator and CPI are the same.
Both are price indices.
Fix: The deflator covers all domestically produced goods and services, with changing weights. CPI tracks a fixed basket bought by consumers and includes imported goods.

Worked examples

Example 1

Nominal GDP of an economy is ₹5,40,000 crore and the GDP deflator is 120. What is real GDP? (a) ₹4,50,000 crore (b) ₹6,48,000 crore (c) ₹5,28,000 crore (d) ₹4,80,000 crore

Show the solution

Real GDP = (Nominal GDP ÷ Deflator) × 100.
Deflator is above 100, so real GDP must be below nominal. This removes (b).
5,40,000 ÷ 120 = 4,500.
4,500 × 100 = 4,50,000.

Answer: (a) ₹4,50,000 crore

Example 2

Real GDP is ₹8,00,000 crore and nominal GDP is ₹10,00,000 crore. What is the GDP deflator? (a) 80 (b) 125 (c) 120 (d) 150

Show the solution

GDP deflator = (Nominal GDP ÷ Real GDP) × 100.
10,00,000 ÷ 8,00,000 = 1.25.
1.25 × 100 = 125.
Nominal is larger than real, so the deflator must be above 100. This agrees with 125.

Answer: (b) 125

Example 3

The GDP deflator rises from 125 to 150 in one year. What is the inflation rate implied by the deflator? (a) 16.7% (b) 20% (c) 25% (d) 12%

Show the solution

Inflation = (Deflator this year − Deflator last year) ÷ Deflator last year × 100.
Change = 150 − 125 = 25.
25 ÷ 125 = 0.20.
0.20 × 100 = 20%.
The choice 25% comes from treating the 25-point change as a percentage. The choice 16.7% comes from dividing by 150 instead of 125.

Answer: (b) 20%

Exam tips

Questions often give two of nominal GDP, real GDP and deflator. Write the formula, rearrange it, then compute.
Check the direction of the answer. Deflator above 100 means real is below nominal.
Theory MCQs ask why real GDP is better for growth comparison, and why GDP is a poor welfare measure. Remember the list: distribution, non-market work, environment, leisure.
Watch the wording "at constant prices" (real) and "at current prices" (nominal).
In percentage questions, the wrong options are usually the wrong base. Divide by the earlier year.

Practice questions from Determination of National Income

Real vs Nominal GDP and Price Indices: frequently asked questions

What is the difference between nominal GDP and real GDP?

Nominal GDP is measured at current-year prices, so inflation inflates it. Real GDP is measured at fixed base-year prices, so it shows only changes in output. Real GDP is the right measure for growth.

What is the GDP deflator formula in CA Foundation?

GDP deflator = (Nominal GDP ÷ Real GDP) × 100. It is 100 in the base year. A value above 100 means the price level has risen since the base year.

How do I calculate real GDP from nominal GDP?

Divide nominal GDP by the GDP deflator and multiply by 100. For example, nominal GDP of ₹6,00,000 crore with a deflator of 150 gives real GDP of ₹4,00,000 crore.

Why is GDP a limited measure of welfare?

GDP does not show how income is distributed. It also leaves out unpaid work, the informal economy, environmental damage and leisure. Two countries with the same GDP can have very different living standards.