Why is real GDP considered a better welfare indicator than nominal GDP?
Answer and explanation
Correct answer: Because it removes the effect of price changes
Nominal GDP may increase merely because prices have risen, even when the economy produces the same quantity of goods and services. Real GDP uses constant or base-year prices, so it focuses more closely on changes in actual output volume. This makes it more useful for comparing production and broad material conditions over time. However, real GDP is not a complete welfare measure because it may omit inequality, leisure, household work, environmental damage and quality of life.
Frequently asked questions
What is the correct answer to this question?
Because it removes the effect of price changes
Why is this the correct answer?
Nominal GDP may increase merely because prices have risen, even when the economy produces the same quantity of goods and services. Real GDP uses constant or base-year prices, so it focuses more closely on changes in actual output volume. This makes it more useful for comparing production and broad material conditions over time. However, real GDP is not a complete welfare measure because it may omit inequality, leisure, household work, environmental damage and quality of life.
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.
