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? 

Distinguish between real GDP and nominal GDP. Which of these is a better indicator of economic welfare and why?

Answer 1

Sr. No.	Real  GDP	Nominal  GDP
1.	Real GDP refers to the total market value of the output at the base year prices.	Nominal GDP refers to the total market value of the output at the current year’s price.
2.	The value of Real  GDP can change only when the volume/quantity of output changes over time.	The value of Nominal GDP can change only with a change in the prices time.
3.	It can be treated as an index of economic growth, i.e., higher Real.	It cannot be treated as an index of economic growth; i.e., higher Nominal GDP does not imply 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.