Question

“Real Gross Domestic Product (GDP) is a better indicator of economic growth of a nation as compared to the Nominal Gross Domestic Product (GDP).”
Do you agree with the given statement? Justify your answer with a valid hypothetical numerical example.

Hint:

Always compare Real GDP to Nominal GDP to adjust for the effects of inflation.

Answer 1

Yes, Real GDP is a better indicator as it accounts for inflation.
- Nominal GDP: Measures output at current prices. 
- Real GDP: Adjusts for inflation, reflecting the true value of goods and services. 
- Example: - Year 1: Nominal GDP = ₹1000 crore, Price Index = 100. - Year 2: Nominal GDP = ₹1200 crore, Price Index = 120. - Real GDP (Year 2) = \(\frac{1200}{120} \times 100 = ₹1000 \, \text{crore}\). Despite an increase in nominal GDP, real GDP remains constant, indicating no actual growth in production.