It is a numbers game.
Nominal GDP = ∑ ptqt
where p refers to price, q is quantity, and t indicates the year in question (usually the current year say 2012)
Real GDP = ∑ pbqt
where b denotes the base year.
Now what do you see here?
The first you see is that the real GDP depends on what base year you are using. In other words you get different numbers of real GDP depends on you using year 2000 or 2005 as the base year. Now you see why I called this a numbers game.
That is because real GDP is only used when people want to compare GDP in one year with past years to study trends in economic growth.
By definition (since real GDP is calculated using prices of a given "base year"), real GDP has no meaning by itself unless it is compared to GDP of a different year. Now you see why it is silly to compare real GDP with norminal GDP in the SAME YEAR. That is how you discover the difference between people who really understand this and the ones who only copy and paste internet articles.
If you still want to compare those numbers in the same year, and if we assume the price is constant, then the only variable is the quantity.
In other words the size of real GDP in any given year will be dependent on the quantity of goods it produced. Now can the size of real GDP be bigger or smaller than norminal GDP? Sure it can. But does it really tells you something? A big NO.
Very good. This is what you learn in 1st year grad school. But that is not the way things work in practice.
China, for example, has growth rates at constant prices processed by either one of two methods: price index deflation method or volume index extrapolation method based upon convenience in each sector or industry. The single deflation gives the value added at constant prices of agriculture, forestry, animal husbandry and fishing, industry, construction, information transmission, computer service, software, wholesale and retail trade, financial intermediation, real estate and leasing services; while the value index extrapolation method calculates constant prices for transport, storage, freight, power and post among others.
There are two reasons for adopting single deflation. One is in China, no product price system exists which can reflect all production results; and moreover, there is a lack of a pricing index which can reflect an intermediate situation of inputs and economic activity. On the other hand, the extrapolation method is not purely production based either, but combines both income and production approach.
In theory, the appropriate price index is the weighted mean of indeces for goods and service prices. But in fact, this ideal situation does not exist at all. For this reason, we have to combine the relative price index and complement some price info. to arrive at an industry specific deflation index in the calculation of GDP at constant prices. This is where Chinese fudging comes in.
But, even assuming your simple theoretical elaboration, what is the significance of your "numbers game" postulate in light of the fact that China's most recent base year (as revised) is 2010, thereby leaving
real GDP growth rate for the series 2011-12 (retroactively) unaffected. India's real GDP numbers, in that sense, are understated because it continues to rely on FY2005-06 as the base year. Even discounting this significantly more upward revision for China, the bilateral conversion factor (which I have calculated to be) of 1.388 does not explain the allusion that "China's nominal GDP is 4 times that of India" considering the relative exchange rate appreciation and the different inflation rates.
Bear in mind also, that in the calculation of Budget deficits, as in the above figure, India's most recent base year is FY 2005-06; whereas, China's (1.1%) budget deficit is based upon a calculation with a more recent base year, 2010; and that therefore, China's budget deficit under this new series is lower than what it would have been had it been computed at the previous (and more comparable) base year 2005, since GDP would be larger in the new series for calculating national income.
