Question

Distinguish between Real Gross Domestic Product (GDP) and Nominal Gross Domestic Product.

Hint:

When comparing economic growth across different years, Real GDP is preferred because it removes the impact of inflation, providing a clearer view of actual growth.

Answer 1

Real GDP and Nominal GDP are both used to measure the total economic output of a country, but they are calculated differently: 1. Nominal GDP:
Nominal GDP measures the total value of goods and services produced in a country within a specific time period, using current prices (i.e., the prices prevailing in the year in which the GDP is calculated). Nominal GDP does not account for inflation or deflation, meaning that if prices increase, Nominal GDP will also increase, even if the quantity of goods and services produced remains the same. Therefore, Nominal GDP can be misleading when comparing economic output across different periods, as it is affected by price changes.
2. Real GDP:
Real GDP adjusts for inflation or deflation by using constant prices from a base year. This means Real GDP represents the value of goods and services produced in a country, adjusted for changes in price levels. Real GDP is a more accurate reflection of the economy's actual growth because it removes the effect of price changes over time. This allows for meaningful comparisons of economic performance between different periods.
Key Difference:
The main difference between Real GDP and Nominal GDP is that Real GDP accounts for inflation, while Nominal GDP does not. Therefore, Real GDP provides a more accurate representation of an economy's true growth by eliminating the impact of price changes.