Question

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

Answer 1

Nominal GDP refers to the GDP at current prices in the market value of the final goods and services produced within the domestic territory of a country during an accounting year, as estimated during an accounting year, as estimated using the current year prices.

Real GDP refers to the GDP at constant prices in the market value of the final goods and services produced within the domestic territory of a country during an accounting year, as estimated during an accounting year, as estimated using the base year prices.

Real GDP is a better indicator as it prevents money illusion- the illusion of a higher market value of disposable income.