Question

Why do economists prefer to use real gross domestic product (RGDP) instead of nominal gross domestic product (NGDP) when measuring the economic growth of a country? Why is real GDP considered more relevant than the other?

Answer 1

Real GDP is the production of goods and services valued at constant prices.

Nominal GDP is the production of goods and services valued at current prices.

Economists prefer to use real GDP rather than nominal GDP when measuring the economic growth of a country because real GDP is not affected by changes in prices, so it reflects only changes in the amounts being produced. If nominal GDP rises, you do not know if that is because of increased production or higher price.

Real gross domestic product is a measurement of economic output that accounts for the effects of inflation or deflation. It provides a more realistic assessment of growth than nominal GDP.

- Real GDP is considered more relevant than the other because

Real GDP tracks the total value produced using constant prices, isolating the effect of price changes. As a result, real GDP is an accurate measure of changes in the output level of an economy.