Distinguish between real Gross Domestic Product and nominal Gross Domestic Product. Which of these is a better index of welfare of the people and why?
Real GDP is the total value of goods and services calculated at ‘constant’ or base price level. Nominal . GDP is the total value of goods and services calculated at ‘current’ price level.
Real GDP is a better index of welfare of the people. When Real GDP rises, flow of goods and services tends to rise, other factors remaining constant. This means greater availability of goods per person, implying higher level of welfare. Also real GDP facilitates periodic comparison of physical output.