Q. Consider the following statements:
1.Real GDP evaluates the value of goods and services at market prices.
2.Nominal GDP evaluates the value of goods and services at constant prices.
Which of the statements given above is/are correct?
Explanation: In order to compare the GDP figures (and other macroeconomic variables) of different countries or to compare the GDP figures of the same country at different points of time, we cannot rely on GDPs evaluated at current market prices. For comparison we take the help of real GDP.
- Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or constant prices).
- Since these prices remain fixed, if the Real GDP changes, we can be sure that it is the volume of production which is undergoing changes.
- Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices.
Source: NCERT – Macro economics