GDP at Current Price

Introduction

• GDP at current price is also referred to as ‘Nominal GDP’, evaluated at current market prices. 
• It includes all of the changes in market prices that have occurred during the current year due to inflation or deflation. 

Calculation of GDP at Current price

• In calculating nominal GDP, only the goods that are being produced in the current financial year are considered at current year prices. This is achieved by using a consumer price index of the country’s basket of goods. 
• If, for instance, India produced only three products—coffee, tea, and car, let’s say—nominal GDP would be calculated by first multiplying the quantity of each product produced by its current market price, and then adding the three results together. 
• In order to calculate it, we first need to know the quantity of each product produced and the up-to-date average price for that product.
• Therefore, (coffee quantity x coffee’s current market price) + (tea quantity x tea’s current market price) + (car quantity x car current market price) = Nominal GDP

Advantages of Nominal GDP

• It’s very easy to ascertain: There’s no complexity in computing nominal GDP as the current market price of a quantity is easy to know and the quantity produced during the year can be gathered easily, so nominal GDP is easy to calculate.
• Easy to understand: If we look at the nominal gross domestic product of two consecutive years, we would be able to tell just by a glance which year is more productive for the country. 

Disadvantages of Nominal GDP

• It does not consider the effect of inflation: Inflation affects an economy badly, so considering the effect of inflation in calculating GDP is crucial. Not considering inflation for the calculation of nominal gross domestic product may be easier, but not a valid calculation. 
• It can’t compare the intricacies of price and quantity: To understand the productivity of the economy, one must compare the result of two years. And it’s not only the total output that matters because the price has always been changing. What matters, rather, is the quantity produced in a year. If we can compare that, then we would be able to understand whether the economy is growing or not. A nominal gross domestic product can’t compare the intricacies of price and quantity.

Effect of Inflation on Nominal GDP

• Inflation will cause nominal GDP to rise, meaning that in looking at year-over-year changes, a rise in nominal GDP does not necessarily reflect economic growth but rather reflects the inflation rate within that period.
• For example, if in the 2019-20 financial year, India produced 150 tons of coffee, which was sold for Rs. 400000/ton, and this year it produced 120 tons of coffee, which currently sells for Rs. 500000/ton, the nominal GDP will have increased despite the fact that coffee production/sales actually decreased in that period.
• In this case, inflation has caused nominal GDP to rise, even as production has decreased. The inverse could theoretically happen with deflation, meaning that if quantity increases but price level decreases, nominal GDP could decrease even as output has increased.

Conclusion

• Nominal GDP is not adjusted to account for inflation but is merely a calculation of the quantity of goods multiplied by their current prices. 
• When nominal GDP is adjusted to account for inflation, it becomes real GDP, which can then be used to understand the percentage of change over time to a country’s economic output.
• This is achieved by using a past year as a base year and comparing that base year to the current year’s real GDP.