RAS Pre 2021, held on 27 October 2021. Question text as printed in RPSC's booklet; answer as per RPSC's final answer key.

‘Base year’ in National Income accounting means –

Q: What is the answer to RAS Pre 2021 Q77?

(3). Correct — option (3), The year whose prices are being used to calculate the real GDP. NCERT's Class XII textbook Introductory Macroeconomics separates two measures. Nominal GDP is the value of GDP at the current prevailing prices. Real GDP values the same goods and services at a constant set of prices, so a change in real GDP shows a change in the volume of production. The constant prices have to come from some year. NCERT names it directly: “the base year (the year whose prices are being used to calculate the real GDP)”. Its example: a country makes 110 units of bread in 2001 at ₹15. Nominal GDP for 2001 is 110 × 15 = ₹1,650. Valued at 2000's price of ₹10, real GDP is 110 × 10 = ₹1,100, and 2000 is the base year. So the base year supplies prices, and only for real GDP: The year whose prices are being used to calculate the real GDP. The idea to remember: real GDP = this year's output × base-year prices; nominal GDP = this year's output × this year's prices.

(1)The year whose income is being used to calculate the nominal GDP
(2)The year whose prices are being used to calculate the nominal GDP
(3)The year whose prices are being used to calculate the real GDP
(4)The year whose income is being used to calculate the real GDP

Answer

(3)

Why

Correct — option (3), The year whose prices are being used to calculate the real GDP.

NCERT's Class XII textbook Introductory Macroeconomics separates two measures. Nominal GDP is the value of GDP at the current prevailing prices. Real GDP values the same goods and services at a constant set of prices, so a change in real GDP shows a change in the volume of production.

The constant prices have to come from some year. NCERT names it directly: “the base year (the year whose prices are being used to calculate the real GDP)”.

Its example: a country makes 110 units of bread in 2001 at ₹15. Nominal GDP for 2001 is 110 × 15 = ₹1,650. Valued at 2000's price of ₹10, real GDP is 110 × 10 = ₹1,100, and 2000 is the base year.

So the base year supplies prices, and only for real GDP: The year whose prices are being used to calculate the real GDP.

The idea to remember: real GDP = this year's output × base-year prices; nominal GDP = this year's output × this year's prices.

Why the others are wrong

(1)
The year whose income is being used to calculate the nominal GDP — Nominal GDP needs no base year at all. It values a year's output at that same year's prevailing prices, so the only year involved is the current year being measured.
A base year enters only when output is revalued at fixed prices, which is the real GDP calculation.
(2)
The year whose prices are being used to calculate the nominal GDP — This mixes the two measures. The prices used for nominal GDP are the current year's own prices, not a base year's.
The phrase “the year whose prices are being used” is NCERT's definition of the base year, but it belongs with real GDP, not nominal GDP.
(4)
The year whose income is being used to calculate the real GDP — Real GDP takes the current year's output and values it at base-year prices. The base year contributes prices, not income or output.
In NCERT's example, the 110 units of bread come from 2001, the year being measured; only the ₹10 price comes from the base year 2000.

Concept

Comparing GDP across years is hard when prices change: GDP can double because prices doubled while output stayed the same. Real GDP removes this by valuing every year's output at the prices of one fixed year, the base year.

The ratio of nominal to real GDP is the GDP deflator, an index of how prices have moved from the base year to the current year. In NCERT's bread example, 1,650 ÷ 1,100 = 1.5, or 150 per cent.

Price indices also have base years, where the base year's price level is set to 100.

RPSC's 2021 syllabus lists “National Income, Growth and Development” within Economic Concepts and Indian Economy.

Rajasthan's Economic Review 2020-21 prepares GSDP at constant prices by “evaluating the goods and services at the prices prevailing in the fixed year known as base year”. It reports State income at current prices and at constant (2011-12) prices.

The same Review shows base years differing by series: 1999-2000=100 for the State's wholesale price index, 2011-12=100 for the all-India one, and 2016=100 for the Consumer Price Index for Industrial Workers (CPI-IW), released on that base from September 2020 in place of the earlier 2001=100.

Key facts

NCERT: base year = the year whose prices are being used to calculate the real GDP.
NCERT: nominal GDP is the value of GDP at the current prevailing prices.
NCERT: GDP deflator = nominal GDP ÷ real GDP.
Economic Review 2020-21: wholesale price index base 1999-2000=100 for Rajasthan, 2011-12=100 for all-India.
Economic Review 2020-21: constant-price GSDP values output at the prices of a fixed base year, 2011-12.

NCERT's bread example: output of 2001, two sets of prices

Nominal GDP, 2001→110 units × ₹15 (2001 price) = ₹1,650

Real GDP, 2001 (base year 2000)→110 units × ₹10 (2000 price) = ₹1,100

GDP deflator→1,650 ÷ 1,100 = 1.5 (150 per cent)

Source: NCERT, Introductory Macroeconomics (Class XII), chapter 2, section 2.4 Nominal and Real GDP.

Study next

GDP deflatorConsumer Price Index and Wholesale Price IndexRevision of base year of national accounts to 2011-12GSDP at current and constant pricesGrowth rate at constant prices

Common traps

Linking the base year to nominal GDP: nominal GDP uses the current year's own prices and needs no base year.
Thinking the base year supplies output: real GDP keeps the current year's quantities and borrows only prices from the base year.
Assuming one base year for every series: Rajasthan's Economic Review 2020-21 uses 2011-12 for constant-price GSDP but 1999-2000=100 for the State's wholesale price index.

A question can ask what the base year means, or which prices real and nominal GDP use.

A question can also give output and prices for two years and ask for real GDP or the GDP deflator.

Related PYQs

RPSC_2023_PRE_GS_Q522023Open & attempt →

Which sector is likely to show highest increase in the real GSVA (Gross State Value Added) at constant basic prices (2011-12) in the year 2022-23 over previous year ?

(1) None of these
(2) Service sector
(3) Industry sector
(4) Agriculture sector

Answer(2)

Uses constant-price figures. That question asks which sector is likely to show the highest increase in real GSVA at constant basic prices (2011-12) in 2022-23 (RPSC's key: Service sector); this one asks the meaning of the base year behind such constant prices.

Practice

practice — not a real PYQ
A country produces only rice. In 2011 it produced 50 units at ₹20 each; in 2021 it produced 60 units at ₹30 each. Taking 2011 as the base year, real GDP for 2021 is
- (a)₹1,000
- (b)₹1,200
- (c)₹1,800
- (d)₹1,500
Answer(2) — Real GDP = 2021 output × base-year price = 60 × 20 = ₹1,200. Option (1) is GDP of 2011, option (3) is nominal GDP of 2021 (60 × 30), and option (4) values 2011's output at 2021's price.
practice — not a real PYQ
If nominal GDP is ₹1,650 and real GDP is ₹1,100, the GDP deflator in percentage terms is
- (a)66.7 per cent
- (b)150 per cent
- (c)110 per cent
- (d)165 per cent
Answer(2) — Deflator = nominal ÷ real × 100 = 1,650 ÷ 1,100 × 100 = 150. Option (1) divides real by nominal, and options (3) and (4) do not follow from the two figures.