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Why is it important to convert the GDP and national income to constant dollar value when...

Why is it important to convert the GDP and national income to constant dollar value when using them as measures of economic welfare?

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GDP and national income, when reported using nominal value, measures the market value of all final goods and services produced in the economy during a period using current year price. Therefore these values are not adjusted for inflation and does not reflect the changes in purchasing power compared to previous periods. On the other hand, when these are measured using a base year price, the values are adjusted for inflation and reflect changes in purchasing power. Since change in purchasing power is an important component of measurement of welfare, it is important to convert GDP or national income to constant dollar values (real values).

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