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Question
Distinguish between “real” gross domestic product and “nominal” gross domestic product. Which of these is a better index of welfare of the people and why?
Solution
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Real GDP |
Nominal GDP |
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1. |
Real GDP refers to the total market value of the output at the base year prices |
1. |
Nominal GDP refers to the total market value of the output at the current year prices. |
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2. |
The value of Real GDP can change only when the volume/quantity of output changesovertime |
2. |
The value of Nominal GDP can change only with change in the prices overtime. |
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It can be treated as an index of economic growth i.e. higher Real |
3. |
It cannot be treated as an index of economic growth i.e. higher Nominal GDP does not implies higher economic growth, in fact, it indicates inflation. |
Real GDP is a better index of economic welfare. This is because a change in the Real GDP reflects a change in the quantity of goods and services produced. The change in the production of goods and services implies a change in the employment and income levels, thereby, indicating a change in the living standards of the people in an economy.
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