GDP at Constant Price

Introduction

• It refers to the GDP estimates that are obtained by expressing the values of goods and services in terms of base year price or a constant price. 
• It is also known as ‘Real GDP’, which is inflation adjusted.
• GDP at constant price or Real GDP provides a more precise picture of a nation’s actual rate of economic growth. 

Calculation of Real GDP

• When calculating Real GDP, a base year is selected to control for inflation. 
• The Real GDP figures capture the quantities of goods produced in different years using the prices from the same base year. 
• The different Real GDP figures from various years reflect changes in volume rather than value.

Real GDP = (Nominal GDP/GDP Deflator) × 100

• Real GDP is regarded as a reliable indicator of a nation’s economic growth as it solely only considers production and is free from currency fluctuations.

Advantages of calculating ‘Real GDP’ or ‘GDP at constant price’

• It factors out the impact of inflation.
• It reveals the actual value of production of a country in a given financial year.  
• While declaring an economy in recession, a decline in Real GDP for two consecutive quarters is considered.
• The Real GDP number allows them to measure growth more accurately. 
• Investors always look into countries’ Real GDP for investment in capital stock and in other financial assets.

Base Year

• A base year can be referred to as a ‘reference year’ with which the values or statistical results from other years are compared.
• The base year is considered to be normal or average which means a year without major economic disturbances or structural changes or a year with low inflation or less price fluctuations. 
• The base year of the national accounts is chosen to enable inter-year comparisons. It gives an idea about changes in purchasing power and allows the calculation of inflation-adjusted growth estimates.
• Base year prices are considered constant as that make up the base for comparison of two or more figures. It is allocated the value of 100 as an index. 
• The market value of the current year GDP for the given output is valued at the base year prices and the growth rate is arrived at. 
• It gives the real output (base year prices) which is different from the nominal output (current prices). In this process, the increase in the value of GDP due to inflation is excluded and the “real increase” of goods and services is found out.
• The new GDP base has been revised to 2011-12 from the earlier base year of 2004-05 to give a more accurate reading of the economy’s structure.

Note: In inflationary periods, Real GDP will be lower than nominal GDP. In deflationary times, Real GDP will be higher.