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?
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Real Gross Domestic Product(Real GDP) is the measure of the values of all the goods and services which is adjusted for inflation of deflation.Nominal GDP measures the same but in terms of the current nominal or monetary value which is not adjusted for inflationary or deflationary effects.
Explanation:
Nominal GDP measures the market value of all the goods and services produced in the economy in nominal terms or at their current market prices.Nominal GDP is not adjusted for any inflationary or deflationary impacts.Hence,it evaluates the overall economic production in the economy in terms of the current and unadjusted market prices.It does not account for the overall changes of the price level in the economy.
On the other hand,real GDP measures the overall market value of all the goods and services produced by the economy based on their real value.The real value refers to the adjustment for any inflationary changes in the economy or the overall changes in the price level of the goods and services.
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