The Downside of Inflation and The Need for Nominal GDP

Before we begin I hope you had a read about the previous 2 blogs on the page. If not and you are interested to get confused I’ll suggest that you continue reading. We know that Inflation is a way of showing growth and why is it so important.

But does this mean really mean growth for the common people?

A short answer will be ‘NOT EXACTLY’. High rate of Inflation will lead to poverty but a nominal rate will not. In a countries like India & China where the rate of Inflation is around 8% the standard of living of a common man does not increase by 8% causing problems. Moreover, everyone has to spare extra 8% while buying anything. This scenario stands true for both working as well as business class of people.

But that’s just about India & China, what about other countries?

In a general rather than aiming for an Inflation as aggressive as 8%, majority countries prefer to keep it down to 4%.

But, isn’t this cheating? They show growth while people are suffering.

Yes, in a short span Inflation feels good but it hits you in the back in a long run. As people begin to reduce usual spending causing a slow down in the market.

What is the solution for all this?

The solution is Nominal G.D.P. Nominal gross domestic product is gross domestic product (GDP) evaluated at current market prices. GDP is the monetary value of all the goods and services produced in a country. Nominal differs from real GDP in that it includes changes in prices due to inflation, which reflects the rate of price increases in an economy.

WOW! Couldn’t understand any of it!

Let me explain, Nominal G.D.P unlike real (normal) G.D.P is calculated on year to year basis. It reflects the comparison between the rise in amount of production to rise in its prices. Hence it clearly shows the rise in prices of commodities are clear but not necessarily the growth (requirement) in production.

Okay, So do we consider Nominal G.D.P in when analyzing the economy of a country?

Actually we do, if you Google for the economy of any country, there will be a clear mention of its Nominal G.D.P.

Sounds like Nominal GDP is great. Let’s remove the real (normal) GDP out of the picture. Shall we?

Well, take it easy. Nominal GDP doesn’t come without its downsides. Firstly, Nominal GDP will show you great differences when considering span of decades (real GDP doesn’t). Secondly, when an economy is mired in recession or a period of negative GDP growth. Negative nominal GDP growth could be due to a decrease in prices, called deflation. If prices declined at a greater rate than production growth, nominal GDP might reflect an overall negative growth rate in the economy. A negative nominal GDP would be signaling a recession when, in reality, production growth was positive. 

Hence when analyzing an economy we must consider both Nominal as well as Real GDP.

 I hope you liked the read, in case you didn’t I am sorry but there is no dislike button, you can always use comments though.

By Bhavik Gandhi  December 16, 2019