Question

Meera and Shahid are two classmates, who were comparing India’s economic growth over the years.

Meera referred to the increase in Gross Domestic Product (GDP) at current prices prevailing in market, while Sahid insisted on considering GDP after adjusting for inflation. Their debate on which of the two measures gives a true picture of people’s well-being, remained inconclusive.

Considering the above mentioned situation, elaborate with valid reason, which of the two variables is considered a better indicator of welfare and why?

Answer 1

1. Meera is looking at Nominal GDP (GDP at current prices), which can rise simply because prices have risen, even if production has stayed the same. Shahid is advocating for Real GDP (GDP at constant prices), which keeps prices fixed to a base year to isolate changes in actual physical output.
2. Welfare is tied to the availability of goods and services per person. If Nominal GDP doubles only because prices doubled, people are not better off; they are just paying more for the same amount of stuff. Real GDP increases only when the volume of production grows.
3. A much better measure of economic well-being is real GDP. It removes the “monetary illusion” caused by inflation and shows the real increase in the resources citizens have access to.