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:

Nominal GDP can be misleading in times of inflation. Always refer to Real GDP for an accurate measure of economic growth.

Answer 1

Step 1: Understanding the Difference Between Real and Nominal GDP.
- Nominal GDP measures the value of goods and services produced in a country at current prices.
- Real GDP adjusts for inflation, measuring economic output at constant prices, making it a better indicator of economic growth.
Step 2: Justification with Numerical Example.
Consider the following data for an economy:
- Year 1: GDP at current prices = Rs.500 crore, Price Index = 100
- Year 2: GDP at current prices = Rs.600 crore, Price Index = 120
Calculating Real GDP: \[ {Real GDP} = \frac{{Nominal GDP}}{{Price Index}} \times 100 \] \[ {Real GDP (Year 1)} = \frac{500}{100} \times 100 = 500 \] \[ {Real GDP (Year 2)} = \frac{600}{120} \times 100 = 500 \] Step 3: Conclusion- Despite an increase in nominal GDP, real GDP remains constant, indicating no actual economic growth. Hence, real GDP is a better measure of economic growth as it accounts for price level changes.