2.

1 CONCEPT OF GDP AND NATIONAL INCOME

National Income
NI or N~tional Product is [Link] as the money value of all final gootU
and services produced within the domestic territory of a country in 1111
accounting year plus net /tutor income from · abroad. National income{
product is the value of production by the normal residents of a country
(within or outside the domestic terrifory).
Domestic income is the value of production within the domestic territory
of a country.
There are many different concepts of national income. Each has a specific
meaning, method of measurement and use. The~e different concepts of
national income are:
1. Gross Domestic Product at Market Price ( GDP ~u-)
2. Gross National Product at Market ,Pric_e' (GNPMP)
3. Net National Product at Market Price (NNPMP)
4. Net Domestic Product at Market Price {NDP~P)
5. Net Domestic Product at Factor Cost (NDPFC)
6. Gross Domestic Product at Factor CoSt '(GDP~)
 7. Gross National Pro d
Cost (GNPFc) - .
8. Ne t Na tio nal Pro d uct at Factor
uct at Factor COSt (NNPFc) . or N~tional Income
NOTES .
.·
1. . Basis of dis tin cti on b etween Gross and N t .
. . . al . e 1s Depredation or
con sum pti on of fixed cap1t .
Gross Ne t+ D . .tion
· · == . . , . -. . .e· prec1a
' ·., '
or Ne t == ··
. Gross - Depre cia tio n
Exception: Gross ou tpu t and. pet output. . .
· . ·
.W her e ,,Gross, ou tpu t == N t
2. Basis of dis tin cti on ..b etw e, oNuati tput + Jntermediate consm:1ption
een onal d D omestic is Ne'
an t factor
pa ym en t fro m abroad.
. :. '·~
Na tio nal == Do me sti c + ·N et £a~to~ pay ~e nt from abroad.
. , . . . , ,. . .
dis tin cti on b tw · M · _.. ; , r- · · -· ; ., ,-
e : eefl·t~ ~~~t Pri~e and ~actor Co·. L
of t
3 . . Ba sis
. dkec : "l't · ·(. ·
.'' ,ax~s :1· ~ -; !.[Link]~ect taxes - Subsidies).
~t is Ne
. t' ' J

. ~ .
irect taxes J
Ma rke t Pri ce == Factor cost+ Net ind
- Subsidi~s) · '"·
-_' . ._ -- , ..,.. Factor cost + (Indirect taxes
~d ired t~ s ·
or Fa cto r Co st --- -.Matl<et 'pric~ - ·-Net
= . Market J?riT~e - (~~ [Link] .t~ ~;: ~ Sti~ .
;idi~s)
:
1 ~· . 1 , J...- ) -
..

10
1'" f _l')':, iJ j • ; ~
• ) t
~ .,,..:, . '

rke~t. Pri~! .(~PfMP) ,·.

• ...._
•

1. Gross Domestic Product at Ma

)Pt ~ ros s~ lpe ~
. s . th~ ~ <]D f MP· }~ rgro s~rof_f<?nsum,[Link]!1 -pf fixed
Th~ ~~~sc!
to~y or res/4ent production units.
~~P!\"1~ 'Dom~s~ic'_?le an s, domest~c teripri ce' m~ ans !Jl~t/~P f ' is·~ajculated
'Product' meari s I fin al pro du cts : 'M ark et
lus ive of ind ire ct tax es and exc lus ive of subsidies. "GDPMP is a
at price inc
market value of lli'e fihai 'ib hds and
macro con cep t wh ich is defined as the
du c~d wi thi n the do me sti c •ter rito ry of a country'auribg one
services pro
pro du cti on un its ind usi v~ of net ind irect taxes and dep.,teci~tion.
year by all
The important po int s to rememb~{ ~~~ut
~PPMP, !Ke: .
GDP is a flo w con cep t, i.e., flo w of goods and ~ervi,cys _prqduced
1. . MP
·previous
goods produced in,_ the
. du ring a year. It ·c.i6~·s ·no t include f~c .. ~ 1

year.
t pdc.1es. In siraation_s where ·price
2. GDPMP· is .always,A]DPMP at ,ur ren ·
of base yea r ·is tak en, it .is calleq .GDRM
.;, at constant· prices.
GD P is no t val ue of ou tpu t bec aus e it ~xclµd c.~ value of,i nt~rmeC4ate
valu~. ~d~~~ PY~ pro ~u ~g
3.
co ns ~p tio n, i.e., GDP;MP ~[Link]? t?~al ,of
y. (It includes value added by
units in do me sti c ·territo ry of a countr
multinatiorial com pan ies in Ind ia.)
 s
4. GDPMP excludes transfer payments, capital gains, financial transaction
and income generated through illegal means.
5. GDPMP is the market value of final goods and services where market
value = price x quantity of final goods and services.
6. To avoid double counting, GDPMP includes only final value of goods
and services.
7. GDPMP is confined to domestic territory of a country and therefore,
excludes NFIA or NFP.
GDPMP is measured by' the formula:
GDPMP Value •of output in domestic territory - Value of
intermediate con_sumption
2. · Gross Nati ona l Product at Mar ket Price (GNPMP -)
ces
GNPMP is defin ed as the mark et valu e of the -fina l good s and servi
ents
prod uced in the dom estic terri tory of a coun try by norm al resid
ad
duri ng an acco untin g year inclu ding net facto r paym ent from abro
(NfP ). _ ,
.'
~ ;
. ....
GNPMP•-is meas ured ,by the formula: __
GNPMP' ~ GDPMP+ NFP t•

3. Net N_a tion al Product at-M arke [Link] (NNPMP)

NNPMPJ.s defin ed as ~e mark et valu~ of the outp ut of final
good s and
estic
[Link]"p r9duced by [Link]:n ,al residents of an economy in its dom
siv~
territory duri ng an accounting year exclusive of depreciation and in~u
of ·net facto r paym ent from . abroad. .) . . l L

NNPMP can be calculated ~y the foll_o ~g formulae:

NNPMP = GNP M; -
Depr~ciatidn
or f • NNPMJ?: = NDEMP + lyFP - • ._
NNPMP = GDPMP+ NFP - Depreciation ,\ .
( .
or r- • ...
...

4. Net Domestic: PrQduct at Mar kef!,;. Price .. {NDP ~p) ~ ':. . .

•. • ~
.# I t ..,_ -

seryi., ce~_p rodu ced

"~ ,
) ... .t,.

NDPMP is defined as the mark. etl value

. (
of.,final goop
. -· '
s and
, •
. . ~l
non-
in the domestic terri tory of a coµntcy, by-. its µorma.). residents and
·
residents Of b.y aq d~ g an ·a~c~~t~ g ye~ iess of depreciation.. _·
NDPM ·P can be chlculated by the following formulae:
NDPMP = GDPMP - O~preci3rt . ion .• ,
NDPMP _ NNPMP - Net factor paym [Link] abro ad
or NDPMP = 1: NVA ... tr NVA = summ ation of Net Value
adde d 0£.·-all firms)

s. Net Domestic Prod uct at Fac~Qr Cqst . (NDPFC) I

ed
NDPFcis alternatively .known a~ ~~t Dom~sti_c I~come. NDPFc is defin
r
as the total facto r inco mes earn ed by the factors of prod uctio n. In othe
Words, NDPPC is the sum of domestic factor incomes.
 alc ulated by the following formulae:
NDP can be c .
of employees +Operating surplus
FC NDP = Compensation •
Fe ,
+ Mixed income of the self - emrloyed
= NDP - Indirect taxes+ Subsidies
ND,n TFC MP
or ,n = NDP - Net indirect taxes
or ND TFC MP
'

_ Gross Oomestk Produ~t at Factor Cost (GDPF,)

6
GDP at factor cost is 'defined as the sum of ne! valu~ added by all the
. the domest·[Link] of a country mdus1ve of depreciation
m
producers .
during an accotm,.ting year. ·
GDP . is measured by the follo'Yffig formulae: .
Fe GDPFC = GDPMP - Indirec
• •
[Link] + Subsidies
I l

.
GDPFC = NDPFC + Depreciation
= Compensation C?f employees .+ Operating
surplus + Mixed income + Depreciation
= Domestic factor income + Depreciation
or
1. Gross Nationat Product ·-at Factor Cost (GNPFe>
GNP-· is defined as the sum, of gt"oss value at factor ·cost by normal
~
&
resi'"dents of a country during a year- and net 1actor "income from
.
abroad; · ·
GNPFC is calculated by the following formulae:
GNPFC ~ NNPFCl+ Depreciation
or GNPFe = GNPMP - Net indirect
I.
taxes
.

8. Net National Product at Factor Cost (NNPF,f or National

Income (NI) - ,
National Income is def\qed ,~ !Jie factor income ~ccruing to tpe normal
resid~nts of the country (rent, interest, profit and wages) during a ·year.
It is tne sum of domestic factor income and net factor income from kbroad.
NNPFt rs·, defined as the sum of net \lalue added a( factor Jost by .normal
residents in the domestic territory of a country and net factor income from
abroad in an accounting year. , , -~ · i ,1

NNPFc or NI is calculated by the' following formulae:

_NNPFc = NDPFc + Net factor payment from abroad
or NI = Domestic factor income + NFIA
= Compensation of [Link] + Operating
surplus + Mixed income + NFP .

.
= NNPMP - Net indirect taxes
Net Factor Paymen t from Abroad ~ Net compen sation of employ ees from
abroad + Net income from property and
entrepre neurship from abroad + Net retained
earnings of resident companies abroad.
 -
,.
\, Ne t Do me stic Pro duc t at Fac tor Co st
\
I
I
- Inc om e fro m net Do me stic Pro I
duc t Inc om e fro m Ne t Do me stic Pro duc t 7

Ac cn1 ing to Pti vat e.S ect or ·

Ac cru ing to Go ver nm ent SectoT
' I I

I -- I ,l I
. '
cor npe nsa tto n + Op era tin g · ·+ [Link] I
J

Pro per ty and I

ofE mp loy me nt . Su rpl us Sav ing s of
Inc om e En tre pr~ neu ria l
1 I · ~ I No n-d epa rtm ent al
Inc om e of
-Ad d I(+ ) En ter pri ses
f ' De par tme nta } .· ·
·.(a ) Ne t F~c ~~r Pa ym ent fr~ 1n Ab roa d Ent er.p rise s
(b) ' Int ere st ·on Na tio nal O ·eb t (
"
( c) Cu rre nt Tra nsf ers f~o m Re ~t of the
Wo rld
(d) Cu1Ten~T ran sfe rs .f rbm the g'o vt:
. .

-· ~ , ), .Pr iv~ ~ ·Ipcoµ:,.e -~· _}

.. , ~ub tr~ c.t ,\ (-) ,. .· .. :..: • ,.· ,
, (a) ~Q ~9 r~t ~o n _r ~ . ·.~--. . . ~ _ •' " . ·- ·
(b) Un d1s tnb ute d Pro fit ot Co rpo rat e Sav ing
I -
- \ Pe rso nal Inc om e \
,_ ~- ~~b!ra<;!_L(- )~ .
{a) ·Di rec t Pe rs0.a al -rr a~
(b) M_isc ell ane ou s.R__eceipts of th~ . -
Go ve in~ en't 'Ad mi nis tra tiv e De par tm ent
s
. Pe rso nal Di spo sab le Inc om e
'

Ho use hol d Co nsu mp tio n + Ho use h9 ld Sav ing

 _ Value of output in domes tic territo ry - Value of
1. GDPMP ,
~
'
Interm ediate consum ption ... (1)
.
.
=i Value added ... (2) I

--2. GNPMP - GDPM P+NFP .

\ - ·'
. . ' , IL•
'
..
-
3. NNPMP - GNPMP - Depre ciation ,. . .
... (1)
.'
. i
= NDPMP +NFIA · '{ I

... (2) ;

.=- GDPMi> + NFP - Depr'eciation ... (3) .

.. . . .
( - , II t \
,J .
4. NDPMP ' \

- NNP MP -NFP ... (1)

. '
. l

'
-
- GDPMP - Del?reciation ... (2)
• I ~ .. '
5. NDPFC -- NDP MP - Indire ct taxes+ Subsidies ...( 1) ·
=-NDP MP - Net indirec t taxes - ... (2)
= COE+ Opera ting Surplu s+ Mixed•incom e ' .-..(3) :
6. GDPFC - Domes tic factor incom e + Consu mption of ~e~ .
capital ... ( 1)
- NDP Fe+ Deprec iation --~(2)
- GDPMP - Indire ct taxes + Subsidies ... (3)
 7. GNPFC _ NNPFe + Depreciation
···(l)
- GDPMP - Net indirect taxes
L - - - - - - t - - - - - - - - : - : - - - - - - - - - - · ··(2)
8. NNPFcor - NNPMP - Net indirect taxes ~
national _ NDPFC + NFP .,.(2)
Income ... (3)
_ Domestic factor income+ NFP
9. Factor Income _ Compensatio n of employees + Rent + Interest+ ~
fromNDP .+ Mixed Income (all accruing to the private sector)
accruing to ... (1)
private sector
- NDPFc - Income from property & entrepreneurship
accruing to govt. administrativ e departments -
savings of non-departm ental enterprises. ... (2)
10. Income from - Income from property and entrepreneur ship to govt.
domestic prod- administrative departments + Savings of non-
uct accruing to departmenta l govt. ent~rprises
public sector
11. Private Income - Income from domestic product accruing to private
sector + Current transfers from government + Interest
on national debt + NFP + Other net transfers from
rest of the world ... (1)
- NDPFc - Incqme from domestic product accruing to
public sector + All current transfer incomes + NFP
... (2)
12. Personal - Private income - Corporate taxes - Undistribute d
Income profits or savings of private Corporate sector net of
retained earnings of foreign companies ... ( 1)
- NI _.Surplus of public sector - Corporation tax -

r ll~~~l-i=-~
, 13.
.
. posable
DlS
p r~ib~
Personal U~n~d~is~t 2
al _•u~t~ed:!p~ro~fi~t +:T:r:a:n~s£~e~r~In~c~o~m~e--:-:--e-s...:..::.~
erson income Personal taxes - M· ll
·
receipts of the government
isce aneous
... (2)

Income ... (1)

- Consumption + Savings
... (2)
,e1u11• ~·· .
NI or NNPFC = 1. Compensation of employees
+ 2 Opemting surplus (rent+ l'O}Qlty + in1o5 + ~)
+ 3. Mixed income of self-employed
+ 4. Net factor payment from abroad
+ 5. Tax on production and imports
+ 6. Business current transfer payments (net)
+ 7. Current surplus ofgovernment enrerprises (or P
 National income + Statistical discrepancy = NNP
Private disposable income is income of the private sector, comprisi
ng domestic
households and businesse s.
Private disposable income= GDP + NFP + Transfer s from
governm ent
(TR) + Interest Payment s received on the
governm ent debt (INT) - Taxes paid to the
govt (T) .... (I)
Net govern!"ent's income =' Taxes (T)- Tr~sfers (TR) - Interest
(INT)
.... (2)
 Adding equation (1) an d (2), we .get:
Private sector's dis po sa ble in co me
+ Ne t govt. In co me ::::
+ TR + IN T - T] + [T - TR - IN T]
=G D P+ NF P

=[ GN P I en ts are cla ssi fie d in to th e· fol lowing groups;

Factor income or pa ym .
(a) ·co mp en sa tio n of em plo ye es
(b) Op era tin g surplus
(c) Mixed inc om e
(d) Net factor inc om e fro m ab ro
ad .
giv es the ite ms inc lud ed in ea ch co mp on en t of factor income.
Fig. 2.2
I
•

Classification of Factor In co me
Com pon ents 9f Fac tor Inc om e
• r

Ope rati ng
Sur plu s
Inco me of the
self -em ploy ed
. l. Inc om e from
The inco me is• I. Wa ges and Sal ade s Pco per ty
mix ed in in Cas h ~ (i) Ren t
terms of (i) Bas ic pay {ii) Inte rest
wages, rent, (ii) 'De ame ss allo wan ce (iii) Roy alty
inte rest and (iii) Hpu $e ren t allo wan ce 2. Inc om e from
profit (iv) OvJ itim e' a'llo wan ce Ent rep ren eur ship
(v) C.C.A. (i) Pro fit
(vi) Bon us and com mis s,i ons {Pr ofit = Div ide nd+
(vii ) Sic k leav e allo wan ce Cor por atio n tax +
2. Com pen sati on in kind Cor por atio n sav ings
{i) Fre e hou sing or und istr ibu ted -
(ii) Me dica l faci litie s pro fit or reta ine d
(iii) Fre e uni form s ear ning s) ·
I
(iv) Free foo d
(v) Fre e edu cati on
(vi) Con vey anc e faci litie s
I
(vii i) Cre che s for Chi ldre n ot·e mp oye es
( ·· ·) one on loa ns
Vilt Val ue of inte rest forg
to emp loy ees
S .
3. Em plo yer' s Con trib utio n to Soc ial ecu nty
Sche mes suc h as
(i) Pro vide nt fun d
(ii) Life insu ran ce
(~ii) Cas u·a lty insu ran ce
flt (_1_v) -~~nsion on reti rem ent
ts d1ttercm from Id , whi ch is a
tran sfer pay men t.] o -ag e pen sion
 1. Compensation of Employees
+ 2. Operating Surplus
+3. Mixed Income
+4. Taxes on rroduction and Imports
+5. Business Current Transfer Payments
+6. Current surplus of Government Enterprises

Net Domestic Product at Factor Cost or

Domestic Income
Add (+)

4. Net factor Payment from Abroad

• ...• t •' I

Net Nat_io·n al Proquc~ at Fact9r Cost or

1 • - ,

National Income
NI by Value Added 1. Gross value added by Primary Sector within
the domestic territory
+ 2. Gross value added by Secondary Sector
within the domestic territory
+ 3. Gross value added by Tertiary Sector within the
domestic territory
- 4. Depreciation
_ 5. Net Indirect Taxes
+ 6. Net Factor Payment from Abroad
dd d thod is shown in Fig. 2·4·
The calculatio n of NI by value a e me ·
 1. Gross value adde~ in prima ry-sec tor
+2. Gross value added in secon dary sector
+3. Gross value added in tertiary sector
~ .
_ Gross Value Added (GVAMP) or GDPMP (1 + 2 + 3)
Subtra ct (-)
I ~ , _; •

. t . .'-
4. Depre ciation ,

.
- -
= ~etVa lueAd ded(N VAMP )or _ND.PM~(1 +2+3 -:- 4)
. ./

Subtr act (-)

5. Net Indirect Taxes
= Net Domestic Incom e or NVAFC (1 + 2 + 3- 4- 5)
Add +
.
6. Net Factor Income from Abroa a· ,
. . .
--
- . Nation al Income or NNPFc (1 + 2 + 3 - 4 - 5_+ 6)

Fig. 2.4 : Measurement of NI by Value Added

 ... - -
total e x p 1 ; .1 a.
+ K - M
C4- I + G
Y=
where n c o t n e
t i o n a l i
Y = Na n e x p e n d i t u re
l .c o n s u m p ti o
C = P e r s o n a l fin a
e x p e n d i t u r e
I = Investment n e x p e n d i t u r e
a l c o n s u m p tio
G = Gov~rnh_len1: fin i n u s i m p o r t s).
X ) ( e x p o r t m
X-M= exports ( N
 Classification ofFinal Expenditure or GDPMP

2. Gross Domestic
.
l. Final Consumption
Expcndilurc Capital Formation

(i) Gross Domestic Fixed Capital (i) ExPorts

(i) Government Final Formation or Gross Domestic
Consumption Fixed Investments. ll consists of:
Expendirure (a) Business fixed investments
+ (b) Goveniment fixed investment
Plus(+)
+ (c) Investment on residential
(ii) Private Final construction by household.
Consumption (lfnet domestic fixed capital fonnation
Expendirurc is given, then depreciation would be
added to make it gross.
• l

Plus(+)

(ii) Change in Stock (Closing Stock

- Opening Stock) or Inventory
Investment ·

Fig. 2.5 : Classification of Final Expenditure or GDPMP

Fig. 2.6 shows how NI is calculated by expenditure method.

Estimation of ·Ni by Expenditure Method ·
1. Priv~te Final Consumption Expenditure
2. Generai Govt. Final Consumption Expe~diture
t,
Add' (+') I •

Final Consumptiot?, Expenditure

~

Add (+)
3. Gross Domestic Capital Fonnation (GDFC)
(GDFC = Gross Domestic Fixed Capital Formation·+ change in stock)
A~d (+),. ,t
4. Net Exports
(Net Exports= Exports- Imports) ,
•I '. ;r.;1 . ' .

Gross Domestic Product at Market Price (GDP~ ) (1 + 2 + 3 + 4)

Add (+)
5. Net Factor Payment from Abroad
Gross National Product at Market Price (GNPMP) ( I + 2 + 3 + 4 -l: 5)

Subtract · (- )
6. Net Indirect taxes
Gross National [Link] Factor Cost (GNPFc) (I + 2 + 3 + 4 + 5- 6)

Subtract (- )
7. Depreciation
Net National Product at Factor Cost (NNPFc) (1 + 2 + 3 + 4 + 5 6 - 7)
 Reconciliation of the Three Methods

Income Method Expendlt

Product/Value Added (Distribution) ( Ure P.1
Method (Creation) Dlsp08 et~0
81) ~

~ J
Net indirect taxes p· i
nvate final
Net indirect taxes expenditure consu01Ption
+
+ Consumption of
Consumption of fixed capital +
fixed capital + Government final
+ Compensc\ltion of Consumption
empfoyees expenditure
Net value added in the ,
+
primary sector at t
Operating surplus
factor cost +
(Rent, interest, Profit) ·
+
Net value added in the
+ . Gross domestic cap·ta
I
Mixed income of the formation I
secondary sector ·at
self-employed
factor cost
+ ' . . +. ' ·,... . +
Net value added in the Ta~~s o~ Production and Imports N .
tertiary sector at + et ~xport of goods and
factor cost [Link] Current Transf~r Payments ~~rv~ces
= GDP · + · ·
MP Current Surplus of Govt. Enterprises = GDPMP
'·+ ' I I.·
=GDPuP

Fig 2.7: ~stimatio

. .
~ PtGDe . ReCO~ciliatiori
MP .. ,
 [£:<Y + NFP-T +TR+ INT)-~

where T ::: Taxes ~

TR == Transfer Payments
INT === Interest income
private saving rate == Private saving :' Private disposable income
z. Government Savin~ {S•) : It is same as government budget surplus.
or net government mcome. ,
sg ::[Govt net income] - [Govt. purchases of goods and services]
j s•= IT-TR-INTJ-G I ... (lJ
3_ National Saving (S) : It is sum of priyate saving and government
saving. Adding equations (2) and (3), we get:
s::: SP+ ss ... (4)
= [(Y + NFP - T + TR+ INT) -CJ+ [T-TR-IN11-G]

S=Y+NFP-<;: , G I ... (5)

Thus, national saving (S) is:
GNP or Y plus NFP minus ·Consumption (C) minus Government
~ Purchase (G)
2.7 .2 Uses of Private saving NX
V
y:::C+I +G+
f y from equation (I) in equation (
Substituting the value o G NX) + NFP - C - G S) If,
S = (C +I+ + 1'\
.~
.·. ~ 'I
CA = Current account balance which is sum
of net '1:~,•
where
net factor payments. \
. al ving is equal to the sum of investment ind
::~n~a::ice~ ""
From equation (4), we have: ·
SP =S-S'
Substituting (7)~,_:_we'.:._h'.'.'.a'.::ve:C,----,---,:- :,
:. IS'= I+ (-5') +CAI -l
three usesofprin
Equation (8) is called uses-of-saving identity. It states
saving as:
I. I (Investment) : Firms borrow private savings
to take up new '1;'i
investment and inventory investment.
provide the mer
2. - SI (Government budget deficit): Private savings
the government needs to finance its budget deficits.
are used to aClf
3. CA (Current account balance) : Private savings
from or lend to foreh:mers .
 -
~Numerical Problem
--·

s o n Conversion o f GDP at
,.s.4 C rren t Prices in to GDP at Const
u . ant Prices
. GDP .at cu rr en t pr ic e
t
GDP a .co ns ta nt pr ic e =
· -i · ;: P ri ce in de x·fo r curren
[Link] x Base year
_~ ·
where Base year== Py{ce in de x of ba se )'e ar is alway
s ta ke n to be 100 .
Question 1 : . ·; ·
convert no m in ~ G D P. m to r~
(a) GDP at cu rr en t Yt!ar p:r;i
.a l ~Pr· .
ce is ~ 1,S0?Q00 an d pr ic e in de
I .•
, ... t

year is f 150. x ~or th e cui:rent

. , : .. • : _.. _
(b) GDP at cu rr en t y:ear pr ic ~s _
}s 'f .3,00,000 ,m ~ cu rr ep t ye~
,p ri ce index is
f 300. , ' . '.: ':•: - . L
~ : ,. ·

Answer.
· .-
(a) GDP"at constant pri.~~s : -- -1 ·50, 000 .·
..:. ' .
· "., . 15·0 x 100

·:·· - ~ ·1,Ob,000

(b) GDP at co ns ta nt prices . _ _3, 00 ~000., X l OO

- · 0' - · 30
i ·•

~ 1,.00,000t
 Nominal GDP x JOO
GDPdeDator = --_ -
Real GDP

Nominal GDP x 100

or Real GDP = GDP deDator

where
Real GDP is the amount by which nomin~GDp
must be deflated.
 P, +l -P,
Inflation rate (Jr),+1
P,

where
= Price level in t + 1 period
pI + 1
P,
= Price level in period t
= Inflation rate between t and t + 1 periods.