Why do economists prefer using real GDP to track a country’s true economic performance?
Answer (2)
Economists prefer real GDP over nominal GDP because real GDP shows the actual growth in output by removing the effects of inflation. This means they can see whether the economy is producing more goods and services—not just charging higher prices.Let’s say the nominal GDP of the Philippines rose from ₱19 trillion to ₱21 trillion in one year. At first, this seems like economic growth. But if inflation was 10% during that year, much of that increase might be due to higher prices, not more production. Real GDP adjusts for this by holding prices constant (usually based on a “base year”), so it can reveal whether real growth happened.Here’s a local example. In 2023, the prices of onions in the Philippines skyrocketed—reaching as high as ₱600 per kilo. If vegetable prices increase across the country, then even if people buy the same amount, total spending goes up. Nominal GDP would rise, but real GDP would stay the same because there was no real increase in output—just more expensive goods.How Real GDP is Used in Decision-MakingPolicy making - The Bangko Sentral ng Pilipinas (BSP) uses real GDP growth to decide on interest rates.Budget planning - If real GDP is rising, the government can increase spending. If it’s falling, stimulus may be needed.International comparisons - Real GDP helps compare countries fairly. A country with rapid inflation might appear rich in nominal terms, but not in real terms.So, real GDP is a truer indicator of economic performance because it focuses on actual production, not price changes. It helps leaders, businesses, and students understand whether the economy is genuinely growing.
Economists prefer using real GDP to track a country’s true economic performance because it adjusts for inflation. This means real GDP reflects the actual quantity of goods and services produced, not just changes in prices. By removing the effect of price increases or decreases, real GDP gives a clearer picture of whether the economy is genuinely growing or shrinking in terms of output, rather than just changes in price levels.
