Contrast the ideas of nominal GDP and real GDP Why is one mo

Contrast the ideas of nominal GDP and real GDP. Why is one more reliable than the other for comparing changes in the standard of living over a series of years? Apply the concept of a price index to comparing the rise and fall of gas prices over a several years. How have you looked at changes in gas prices in the past, in a nominal or a real manner?

Solution

Nominal GDP is a measure of the market value of all final services and goods produced by the economy in a particular year. We use nominal values as a common denominator in order to sum that heterogeneous output into a meaningful total.The question then arises , how we can comare the market values of GDP from year to year if the value of money itself changes in response to inflation or deflation?

The answer is to adjust nominal GDP to take into account potential changes in prices.This results in real GDP, where nominal GDP has been inflated or deflated to reflect changes in price level (also called adjsuted GDP). Obviously,we will want to use Real GDP to compare standards of living over time.Individuals are concerned about the amount of actual goods consumed rather than the nominal value of the goods.Would you prefer to have two candy bars priced at USD1.0 or one candy bar priced at USD2.0?Both have the same nominal values of consumption.