Mod 3: Nominal vs Real GDP, the GDP Deflator & Inflation

📖 Chapter 2 🧩 Module 3 of 16 ⏱️ ~5 min read 💡 20 MCQs

Topic Part 1 of 2

Concept

3.1 Nominal GDP, real GDP and the GDP deflator (NCERT Class 12)

🏫 School level · NCERT Class 9–12 (the base for UPSC, BPSC, SSC and Bank exams)

Current prices versus base-year prices

Nominal GDP values this year’s output at this year’s (current) prices. Real GDP values the same output at the prices of a fixed base year (constant prices). If prices rise while quantities stay the same, nominal GDP rises but real GDP does not. Real GDP is therefore the measure of growth in physical output.

Fig 3.1 Nominal GDP rises faster than real GDP whenever prices rise; the gap is the price effect.

GDP deflator

Deflator = (Nominal GDP ÷ Real GDP) × 100

base year = 100

Real GDP

Real GDP = (Nominal GDP ÷ Deflator) × 100

Approximate growth

Real growth ≈ Nominal growth − Inflation

India FY 2025-26: nominal 8.6%, real 7.8% (NSO)

Table 3.1 Two-good economy (base year = Year 1)
Good	Year 1 (qty × price)	Year 2 (qty × price)
Rice	100 × ₹10	110 × ₹12
Cloth	50 × ₹20	55 × ₹22

Worked example

Using Table 3.1, find nominal and real GDP of Year 2, the deflator and real growth.

Year 1 GDP = 100×10 + 50×20 = ₹2,000 (nominal = real in the base year).
Year 2 nominal = 110×12 + 55×22 = 1,320 + 1,210 = ₹2,530.
Year 2 real (Year 1 prices) = 110×10 + 55×20 = 1,100 + 1,100 = ₹2,200.
Deflator = 2,530 ÷ 2,200 × 100 = 115. Real growth = (2,200 − 2,000) ÷ 2,000 = 10%.

Nominal ₹2,530; real ₹2,200; deflator 115; real growth 10%

Table 3.2 Three price measures
Measure	Covers	Notes
GDP deflator	All goods and services produced in the country, including capital goods; excludes imports	Implicit; weights change with output
Consumer Price Index (CPI)	A fixed basket bought by households, including imported consumer goods and services	NSO; new series base 2024 = 100; the RBI targets CPI inflation
Wholesale Price Index (WPI)	Goods at the wholesale stage; no services	Office of the Economic Adviser, DPIIT

⭐ Key Points for Exams

Nominal GDP: current prices; real GDP: base-year prices.
Deflator = nominal ÷ real × 100.
Real growth ≈ nominal growth − inflation.
CPI (base 2024) is the RBI’s target measure; deflator covers all domestic output.

📌 Quick-Fire One-Liners

Nominal 220, real 200: deflator? Answer: 110
Which GDP measures physical output growth? Answer: Real GDP

Topic

Questions

MCQs

Answer this question, then use Next.

If output is unchanged and all prices rise, NCERT Class 12 says:

Explanation: Real GDP holds base-year prices, so unchanged output means unchanged real GDP. Nominal GDP records the higher prices.

Nominal GDP is 220 and real GDP is 200. The price deflator, with the usual scaling by 100, is:

Explanation: Deflator = (nominal ÷ real) × 100 = (220 ÷ 200) × 100 = 110. The gap of 20 is not the index, and adding the two GDP figures is not a price index.

[School] The GDP deflator is calculated as:

The deflator measures how much of nominal GDP is price change: nominal ÷ real × 100. In the base year it equals 100; above 100 means prices are higher than in the base year.

[Numerical] Nominal GDP grows 12% and the GDP deflator rises 5%. Real GDP growth is about:

Real growth ≈ nominal growth − inflation = 12 − 5 = 7% (exactly 1.12 ÷ 1.05 − 1 ≈ 6.7%).

[Numerical] In Year 2, rice 110 units at ₹12 and cloth 55 units at ₹22; base-year prices were ₹10 and ₹20. Real GDP of Year 2 at base-year prices is:

Real GDP uses current quantities at base prices: 110 × 10 + 55 × 20 = 1,100 + 1,100 = ₹2,200. ₹2,530 is nominal GDP (current prices).

[UPSC level] How does the GDP deflator differ from the CPI?

An imported phone that gets costlier raises CPI but not the deflator; a domestically made machine that gets costlier raises the deflator but not CPI. The CPI basket is fixed; the deflator’s weights change with output.

[RBI Grade B level] The new series of India’s Consumer Price Index released by the NSO uses the base year:

The NSO’s CPI releases in 2026 use base 2024 = 100 (September 2026 combined index 109.49). The earlier series used 2012 = 100. Older exam questions keep their own base years.

Question 1 of 7

One-liners

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Nominal 220, real 200: deflator?

110

Which GDP measures physical output growth?

Real GDP

Question 1 of 2

Topic Part 1 of 2

Concept

3.2 Real income, inflation and who bears it

🏫 School level · NCERT Class 9–12 (the base for UPSC, BPSC, SSC and Bank exams)

Real income = money income ÷ prices

Real income = money income ÷ price level. If money income and prices rise by the same proportion, real income is unchanged. If prices rise faster than incomes, real income falls. That is why inflation redistributes income even when total output does not change.

Table 3.3 Who gains and who loses from unexpected inflation
Gains	Loses
Debtors (repay in cheaper money)	Creditors and lenders
Businesses, profit earners (prices rise before wages)	Wage earners whose contracts lag prices; fixed-income groups, pensioners
Holders of real assets (land, gold)	Savers holding cash or low-interest deposits

📗 Kinds of inflation

Demand-pull: too much spending chasing too few goods; usual in fast growth (so growth is “usually coupled with inflation”).
Cost-push: costs rise (crude oil, wages, a weak rupee raising import prices).
By speed: creeping (below about 3%), walking or trotting (single digit), galloping or running (double digit), hyperinflation (extremely rapid, e.g. above 50% a month in Cagan’s definition).
Stagflation: inflation together with stagnant output and high unemployment (1970s oil shocks).
Deflation: a fall in the general price level. Disinflation: a fall in the rate of inflation, prices still rising.

🇮🇳 India now

Combined CPI inflation was 5.54% in September 2026 (rural 6.08%, urban 4.88%; food 7.74%) on the new base 2024 = 100 (NSO, 12 October 2026). The RBI projected CPI inflation of 5.2% for FY 2026-27 and raised the repo rate to 5.50% on 7 October 2026.

⭐ Key Points for Exams

Real income = money income ÷ price level.
Inflation helps debtors and profit earners; hurts creditors, pensioners, wage earners whose pay lags.
Demand-pull vs cost-push; stagflation; deflation vs disinflation.

📌 Quick-Fire One-Liners

Prices and income both double: real income? Answer: Unchanged
Falling rate of inflation is called? Answer: Disinflation

Topic

Questions

MCQs

Answer this question, then use Next.

Money income rises 10 percent and the price level rises 10 percent. Real income:

Explanation: Both numerator and denominator of real income scale by 1.10, so the ratio is unchanged.

During a spell in which product prices have risen and wage contracts have not yet been revised, labour’s share of nominal GNP tends to:

Explanation: The lag raises the profit share relative to wages. A fall in output is not required.

Over a period, both prices and money income double. Real income will:

Explanation: Real income is the ratio of money income to the price level. Multiplying the top and the bottom by the same number leaves the ratio unchanged.

[SSC pattern] Stagflation is a situation of:

Stagnation + inflation. It appeared in the 1970s after the oil-price shocks and contradicted the simple Phillips-curve trade-off.

[School] Unexpected inflation generally benefits:

Debtors repay loans in money that buys less than when they borrowed. Creditors, pensioners and fixed-salary earners lose purchasing power.

[Bank PO pattern] Disinflation means:

If inflation falls from 6% to 4%, prices are still rising, but more slowly: disinflation. A falling price level is deflation.

[School] A sharp rise in world crude oil prices that raises transport and production costs causes:

The cause lies on the supply side (higher input costs), so it is cost-push. Demand-pull comes from excess spending.

[SSC pattern] Inflation of 20–30% a year is usually called:

Double-digit inflation is galloping (running). Creeping is low single digit; hyperinflation is extreme (prices doubling within weeks or months, as in Zimbabwe 2008).

Question 1 of 8

One-liners

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Prices and income both double: real income?

Unchanged

Falling rate of inflation is called?

Disinflation

Question 1 of 2

Topic Part 1 of 2

Concept

🎯 Competitive Level (UPSC Pre · BPSC Pre · State PSC · SSC · Bank PO · RBI Grade B): Nominal, real and inflation in past papers

Exam map
Exam	What it asks from this module
UPSC Prelims	growth coupled with inflation (2011); current vs constant per capita income (2000)
BPSC / State PSC	nominal GDP (CGPSC 2023); real income when prices and income double (UPPSC 2004); wage lag (UPPSC 2008)
SSC / Railways	stagflation, deflation, cost-push examples
Bank PO / RBI Grade B	deflator numericals; CPI vs deflator; inflation target

🏆 Previous Year Question · UPSC CSE Prelims 2011

UPSC CSE Prelims 2011

Economic growth is usually coupled with: (a) Deflation (b) Inflation (c) Stagflation (d) Hyper-inflation

Growth raises incomes and spending; supply catches up only with a lag.
The result is moderate, demand-pull inflation, not falling prices (deflation), not stagnation (stagflation) and not runaway prices.

(b) Inflation

⭐ Key Points for Exams

UPSC 2011: growth is usually coupled with inflation.
UPPSC 2008: labour’s share falls when wages lag behind prices.

📌 Quick-Fire One-Liners

Current-price growth exceeds constant-price growth because of? Answer: Rise in the price level

Topic

Questions

MCQs

Answer this question, then use Next.

Question 11: Nominal (GDP) is: [Chhattisgarh P.C.S. (Pre) 2023]

Explanation: Nominal GDP is evaluated at current market prices without adjusting for inflation. Real GDP values the same quantities at base-year (constant) prices. GDP converted at the exchange rate is a dollar figure, not “nominal” in this sense.

Question 40: The growth rate of Per Capita Income at current prices is higher than that of Per Capita Income at constant prices, because the latter takes into account the rate of: [I.A.S. (Pre) 2000]

Explanation: Constant price estimates adjust for price inflation (increase in price level). Hence, current price growth is higher by the inflation rate.

Question 15: If over a given period of time both prices and monetary income have been doubled, the real income will be: [U.P.P.C.S. (Mains) 2004]

Explanation: Increased prices exactly balance the increased monetary income, leaving real purchasing power unchanged. Real income = money income ÷ price index. (2 × income) ÷ (2 × prices) = the same ratio.

Question 21: Economic growth is usually coupled with: [I.A.S. (Pre) 2011]

Explanation: Economic expansion increases income and demand, causing moderate demand-pull inflation. As incomes and spending rise faster than supply can respond, prices rise moderately (demand-pull). Deflation and stagflation go with weak growth; hyper-inflation destroys growth.

Question 22: The proportion of labour in GNP (Gross National Product) becomes low due to the following reason: [U.P.P.C.S. (Mains) 2008]

Explanation: During inflation, prices rise faster than contractual wages, reducing labor's relative share in national product.

Question 1 of 5

One-liners

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Current-price growth exceeds constant-price growth because of?

Rise in the price level

Question 1 of 1