Why do economists prefer using real GDP instead of nominal GDP when comparing economic growth over time?
Answer (2)
Economists prefer real GDP over nominal GDP when comparing growth over time because real GDP shows the actual increase in production, while nominal GDP can be misleading due to changes in prices (inflation or deflation).Nominal GDP measures a country's output using current prices. This means if prices rise due to inflation, nominal GDP will increase—even if there was no real increase in goods or services. For example, if the Philippines produced the same number of mangoes this year but the price per kilo doubled, nominal GDP would increase, but production stayed the same.Real GDP, on the other hand, uses prices from a base year to remove the effects of inflation. It shows how much more (or less) was really produced, not just how much it costs.Let’s say the Philippine nominal GDP increased by 7% in one year. If inflation that year was 5%, the real GDP growth was only about 2%. That 2% represents actual growth in output—more jobs, more services, more products.Real Gross Domestic Product as Measure of Economic Growth Policy decisions - If growth is due only to inflation, the government might wrongly assume the economy is doing well and avoid necessary interventions. Real GDP gives a more accurate picture.Wages and income - Workers want real wage increases. If nominal wages go up but prices go up even faster, their real income goes down. Real GDP helps us understand this dynamic.International comparisons - Economists comparing countries over time need a fair measure. A country with high nominal GDP may seem rich, but if prices are too high, its real GDP might be low.Investment planning - Investors and businesses rely on real growth figures to decide where to expand. Real GDP provides the most realistic data for that.Real GDP is preferred because it gives a clearer and more honest measurement of economic growth. It helps leaders, workers, and citizens understand whether the economy is truly getting better.
Economists prefer using real GDP instead of nominal GDP because real GDP is adjusted for inflation. This means it reflects the true increase in the quantity of goods and services produced, rather than changes in prices. Nominal GDP can be misleading over time since it rises simply if prices increase, even if the actual output stays the same. Real GDP gives a more accuràte measure of economic growth.
