Question

a) Explain the difference between GDP and GNI.

b) Explain the difference between real GDP and nominal GDP and why it's useful for economists to have info for both.

Answer 1

a. GDP is the Gross Domestic Product. It is the measure of the market value of final goods and services produced in an economy in a given year within the geographic boundary of the economy.

GNI is Gross National Income. It is the measure of the total income earned by the nationals of a country ina given year from domestic as well as foreign sources. GNI = GDP + net receipts from abroad.

b. Real GDP is the value of final goods and services produced in an economy in a given year measured in terms of constant price. Nominal GDP is the measure of the value of final goods and services produced in an economy in a given year measured in terms of current price. Therefore, real GDP is the value of output after adjusting for inflation.

Nominal GDP shows how much the output is worth at current price. Current price is the price at which goods and services are produced and consumed currently. Therefore, it informs economists about the value of the output at present.

Real GDP shows the actual progress in output as compared to any previous year. We can compare the real GDP of an economy of two years and find out the actual change in the output between these two years.