Question

10b）Why do we need to calculate Real GDP? If Real GDP is so important, why do we care about Nominal GDP? Should we stop reporting Nominal GDP?

Answer 1

Real GDP measures the purchasing power of the consumer, by including change in price level across periods in the GDP. It is computed as the sum of value of all final goods and services produced in the economy in the current period, measured at some designated base year prices. Since real GDP reflects the change in purchasing power, an economy's growth rate is measured by its change in real GDP over time.

However, at an absolute level, nominal GDP measures the current value of output produced in the current period. Reporting of nominal GDP should not be stopped, since selection of the base period is arbitrary and therefore there is no standard yardstick on comparing real GDP among different countries, since it depends on the selection of base period. Nominal GDP does not suffer from this problem and is therefore used as a comparison yardstick of GDP (total output) across countries.