Central Bureau of Statistics (CBS) has an estimated GDP growth rate of 2.27 percent for FY2019/20. What does this growth rate mean? This growth rate simply means GDP growth in real terms or inflation-adjusted GDP.
To understand the economic growth in simple terms,
Let us assume that:
a. The economy only produces one good, Potato (say)
b. The base year is 2071 and the price in 2071 is Rs. 15 per kg
With these two assumptions, let us calculate
In Table 1, the real GDP growth rate in the Year 2075 is 3.70 percent, and the nominal GDP growth rate is 8.60 percent. The difference in nominal GDP and real GDP is due to price differences, which means that in base year price of Potato was Rs. 15 and in the Year 2075 it is Rs. 22. Thus, a growth rate of 3.70 percent is purely a growth in the production of Potato. Similarly, in the Year 2073, the real GDP growth rate is -2.86 percent, but the nominal GDP growth rate is 14.30 percent. This is because the percentage increase in price in 2073 is greater than the percentage decrease in the production of Potato in the same year.
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