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CA Foundation · Business Economics · Determination of National Income

Nominal GDP of an economy rose from ₹800 crore in year 1 to ₹1,056 crore in year 2. The GDP deflator rose from 100 in year 1 to 120 in year 2. Between the two years, real GDP:

Real GDP increased by 10 percent. Deflating year 2 nominal GDP of ₹1,056 crore by 120 gives ₹880 crore, against ₹800 crore in year 1. Nominal GDP grew 32 percent, but much of that was inflation of 20 percent, not additional output.

  1. AIncreased by 10%Correct
  2. BIncreased by 32%
  3. CRemained unchanged
  4. DIncreased by 20%

Explanation

Year 1 real GDP = 800/100 × 100 = ₹800 crore. Year 2 real GDP = 1,056/120 × 100 = ₹880 crore. Growth = 80/800 = 10%. The 32% figure is nominal growth (256/800), ignoring the price rise; 20% merely copies the inflation rate.

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