(a) Real Gross Domestic Product is a better indicator of economic growth
than Nominal Gross Domestic Product'.
Do you agree with the given statement? Support your answer with a suitable
numerical example.
(b) Calculate 'Depreciation on Capital Asset' from the following data
S.no Particulars
i. Capital value of the asset
ii. Estimated life of the asset
Scrap Value
Amount (in crores)
1,000
20 years
Nil
III.
Answers
a) Yes, as nominal GDP disguises the effect that the fluctuation in price value may have had on the GDP. Real GDP will take this into account & allow you to compare the production b/w two years more accurately.
eg.
If the Nominal GDP of a year 2 is 2000 crores
& the Nominal GDP of year 1 is 1500 crores, where the GDP deflator w.r.t. to a certain base year is 150
judging by the nominal GDPs, it appears as though the GDP growth is 500 crores.
whereas the comparison of Real GDPs:
Y2: 150 = (2000/rGDP)*100, rGDP = 20,000/15 = 1333.33
Y1: 150 = (1500/rGDP)*100, rGDP = 15,000/15 = 1000
Thus the actual growth is 333.33 crores, & the use of nominal GDP's can be deceptive & misleading with respect to actual production.
b) Annual Depreciation on Capital asset is defined as:
(Cost of asset - scrap value)/Lifespan
= (i - iii)/ii
= (1,000 - 0)/20 = 50
The asset will depreciate annually by 50 crores.