Question

Discuss real and nominal GDP. Point out how they are alike and how they differ. Also, explain the problem with using nominal GDP to measure the growth of the economy.

Answer 1

Real and Nominal GDP differ on what they measure. The Real GDP measures goods and services in the economy with prices adjusted for inflation, while Nominal GDP just takes the prices of the current year. The difference and the point of this would be that if one measures Nominal GDP you don't know whether the GDP went up because there were more goods and services produced or because the inflation rate went up. Real GDP measures the actual growth of the economy with adjusted prices to one similar base year. So you can see that the problem with using nominal GDP to measure the growth of the economy is that one doesn't know whether the economy grew or whether the value of the dollar just fell (aka inflation went up). Hope this helps!