आर्थिक तथा बैकिङ्ग ज्ञान : जिज्ञाशा न. १५ : Why real GDP (GDP at constant price) is not used to measure the size of the economy?

Real GDP is the market value of all final goods and services produced within the boundary of the economy within a specified period of time where the output produced is valued at some base year prices. To put it simply, if we multiply the output produced over time with the prices from the chosen base year, we arrive at real GDP ( also called GDP at constant prices).

While measuring the size of the economy, we use the value of GDP measured at current prices. Such a figure can be misleading because nominal GDP can increase with the increase in price level even when the real output has risen insignificantly. Such problem can be overcome by using real GDP statistics. However, the value of Real GDP itself is not a good measure for the purpose because its value depends on the year chosen as the base year. If we rebase the GDP series, the values of real GDP will change obviously making it inconvenient to compare with the old series.  

Let us see an example from Nepal. 

	Nominal GDP	Real GDP at 2001/01 prices	Growth Rate	Real GDP at 2004/05 prices	Growth Rate	Real GDP at 2009/10 prices	Growth Rate	Real GDP at 2018/19 prices	Growth Rate
2000/01	441519	441518		522837		851426		1610008
2001/02	459443	442049	0.1	523465	0.1	852449	0.1	1611943	0.1
2002/03	492231	459488	3.9	544116	3.9	886079	3.9	1675536	3.9
2003/04	536749	481004	4.7	569595	4.7	927570	4.7	1753994	4.7
2004/05	589412	497739	3.5	589412	3.5	959841	3.5	1815018	3.5
2005/06	654084	514486	3.4	609243	3.4	992136	3.4	1876085	3.4
2006/07	727827	532038	3.4	630028	3.4	1025984	3.4	1940090	3.4
2007/08	815658	564517	6.1	668489	6.1	1088616	6.1	2058525	6.1
2008/09	988272	590107	4.5	698792	4.5	1137965	4.5	2151841	4.5
2009/10	1192774	618529	4.8	732449	4.8	1192774	4.8	2255482	4.8
2010/11	1366954	639694	3.4	757512	3.4	1233588	3.4	2332660	3.4
2011/12	1527344	670279	4.8	793730	4.8	1292569	4.8	2444190	4.8
2012/13	1695011	697954	4.1	826502	4.1	1345937	4.1	2545107	4.1
2013/14	1964540	739754	6.0	876001	6.0	1426545	6.0	2697533	6.0
2014/15	2130150	764336	3.3	905110	3.3	1473947	3.3	2787169	3.3
2015/16	2253163	768835	0.6	910438	0.6	1482624	0.6	2803577	0.6
2016/17	2674493	832060	8.2	985308	8.2	1604548	8.2	3034129	8.2
2017/18	3031034	887455	6.7	1050905	6.7	1711371	6.7	3236127	6.7
2018/19	3464319	950033	7.1	1125009	7.1	1832047	7.1	3464319	7.1

 
 The value of real GDP for 2018/19 when evaluated at 2000/01 prices is 950033 million whereas the real GDP for the same year when evaluated at 2004/05 prices is 1125009 million, at 2009/10 prices is 1832047 million and at 2018/19 prices is 3464319 million. Thus, the value of real GDP for 2018/19 depends on the base year chosen. As there is the practices of rebasing GDP figures on a continuous basis with the changing structure of economic activities, real GDP value is not a proper measure to measure the actual size of economic activities.

Real GDP figure is used to measure the performance of the economy over time. Economic growth is simply the percentage change in the real GDP. In the above table, we see that whatever the base year used for the estimation of real GDP, economic growth rate  remains unchanged.