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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? - CBSE (Arts) Class 12 - Economics

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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

Real  GDP

 

Nominal  GDP

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.

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.

 

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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Solution 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? Concept: Real and Nominal GDP.
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