Why is real GDP a more accurate measure of an economy's production than nominal GDP? Real GDP measures the value of the goods and services an economy produces, but nominal GDP measures the value of the goods and services an economy consumes. Real GDP is not influenced by price changes, but nominal GDP is. Real GDP includes the value of exports, but nominal GDP does not.

Question

Amiya Bowen

Business

17 May, 14:10

Why is real GDP a more accurate measure of an economy's production than nominal GDP? Real GDP measures the value of the goods and services an economy produces, but nominal GDP measures the value of the goods and services an economy consumes. Real GDP is not influenced by price changes, but nominal GDP is. Real GDP includes the value of exports, but nominal GDP does not.

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Rebekah Snow · Answer 1

Answer: Real GDP is not influenced by price changes, but nominal GDP is

Explanation:

Gross Domestic Product is the amount of final goods and services that a country produces domestically within a certain period which is usually a year.

There is Real GDP and Nominal GDP.

Real GDP is Nominal GDP adjusted for inflation while Nominal GDP is GDP for the year with current prices.

When Inflation occurs, it can have the effect of overstating the growth of an economy because it values the final goods higher than the previous period even if the economy may not have grown.

Real GDP is better therefore because it removes this inflationary effect (price change) thereby allowing us to see if indeed the Economy has grown and is producing more by standadizing the prices across the periods being compared.