Why is real GDP better than nominal GDP for welfare comparisons?
Answer and explanation
Correct answer: Because it separates the effect of price changes
Nominal GDP values current production at current prices, so it can increase merely because prices have risen. Real GDP values production using constant or base-year prices and therefore focuses more closely on changes in the quantity of output. This makes comparisons across years more meaningful for welfare analysis, although real GDP still does not fully capture distribution, unpaid work or environmental quality. Hence C is correct.
Frequently asked questions
What is the correct answer to this question?
Because it separates the effect of price changes
Why is this the correct answer?
Nominal GDP values current production at current prices, so it can increase merely because prices have risen. Real GDP values production using constant or base-year prices and therefore focuses more closely on changes in the quantity of output. This makes comparisons across years more meaningful for welfare analysis, although real GDP still does not fully capture distribution, unpaid work or environmental quality. Hence C is correct.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
