Difference Between Real GDP And Nominal GDP

Difference Between Real GDP And Nominal GDP

Discuss the difference between real GDP and nominal GDP, which is used by economists to measure economic well-being and why. Why is a large GDP a good thing? Give an example of something that would raise GDP but would be considered undesirable and explain.

GDP is the measure that shows the value of goods as well as services that a nation’s economy produces less than the value of services and goods that are consumed during production. It also reflects the total expenditures of individuals, investment of the private sector, net value of exported services and goods, as well as the government’s consumption of goods and services and investment. Real GDP is the measure that considers the inflation rate of an economy. Nominal GDP is the measure that does not incorporate the inflation rate of costs. Scientists, to measure an economy’s well-being, use the real GDP. This is because the real GDP portrays the economy’s actual growth or decline once it factors in the rate of inflation (Dynan, 2018).

A large GDP is good because it shows that a country is wealthier than its counterparts. A country that produces more goods and services is likely to record higher revenue, which implies that the nation is making more money from different sectors. A higher economic growth implies that the citizens’ standards of living improve (Kapoor & Debroy, 2019). However, GDP does not incorporate the wage gap that accompanies economic growth or negative factors such as changes in climate. Increased government spending is one of the factors that can raise GDP. It is undesirable because it increases a country’s deficit. The increased government expenditure is supported through loans from international bodies such as the International Monetary Fund (IMF). The loans that a government borrows signify expenditure that exceeds a country’s revenue (Al-Abri, Genc, & Naufal, 2018). Despite the growth and development that a country experiences, the debt increases. In the future, it will consume a country’s revenue through payment of the initial amount and the accrued interest.  It could also lead to higher taxes.

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References

Al-Abri, A., Genc, I. H., & Naufal, G. (2018). The Impact of Government Spending on GDP in a Remitting Country. Bonn: Institute of Labor Economics.

Dynan, K. (2018). GDP as a Measure of Economic Well-being. Hutchins Center Working Paper#4. Retrieved from https://www.brookings.edu/wp-content/uploads/2018/08/WP43-8.23.18.pdf

Kapoor, A., & Debroy, B. (2019). GDP Is Not a Measure of Human Well-Being. Harvard Business Review. Retrieved from https://hbr.org/2019/10/gdp-is-not-a-measure-of-human-well-being

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Gross Domestic Product (GDP)

Discuss the difference between real GDP and nominal GDP, which is used by economists to measure economic well-being and why. Why is a large GDP a good thing? Give an example of something that would raise GDP but would be considered undesirable and explain.

Difference Between Real GDP And Nominal GDP