Why is real GDP more useful than nominal GDP in comparing economic growth over time?
Answer (2)
Real GDP is more useful than nominal GDP when comparing economic growth across different years because it accounts for the effect of inflation, which is the general increase in prices. Nominal GDP measures the value of goods and services using current prices, while real GDP adjusts for price changes by using constant prices from a base year. This allows us to see whether the actual output of goods and services has increased, instead of just prices.For example, suppose the Philippines had a nominal GDP of ₱20 trillion in 2023 and ₱22 trillion in 2024. At first glance, it looks like the economy grew by ₱2 trillion. But if inflation was 10% that year, the increase might just be due to higher prices rather than more goods or services being produced. Real GDP would remove the effect of the 10% inflation and give a clearer picture—maybe the actual growth in output was only ₱500 billion.This matters especially when inflation is high. A student might hear that the government reported GDP growth, but if prices are also rising quickly, people may not actually feel that growth in their everyday lives. That’s why real GDP is a more reliable measure of whether the economy is truly producing more, or just charging more.In the Philippine setting, we often see prices go up—on rice, jeepney fares, and utilities. But this doesn't always mean economic progress. Policymakers, businesses, and economists use real GDP to guide decisions on budgeting, taxes, and economic programs, because it reflects real production and real growth.So, when comparing GDP over time, always look at real GDP, because it tells the real story of how the economy is performing.
Real GDP is more useful than nominal GDP for comparing economic growth over time because it accounts for inflation or deflation, while nominal GDP does not.Nominal GDP measures a country's total economic output using current prices, which means it includes the effects of price changes (inflation or deflation).Real GDP adjusts for changes in price levels by using constant prices from a base year, allowing for a more accurate comparison of economic output over different time periods.Example,If nominal GDP increases from one year to the next, it could be due to:Increased production of goods and services (real growth), orHigher prices (inflation), or both.Only real GDP can isolate and reflect the true growth in the volume of goods and services produced, making it the better tool for analyzing economic performance over time.
