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Distinguish between real GDP and nominal GDP. Which of these is a better indicator of economic welfare and why?

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National Income at Current Price (Nominal GDP) National Income at Constant Price (Real
Under this, GDP is calculated at current prices prevailing in the market. For example, if we measure India’s National Income of 2011-12 at the same year’s prices then it is national income at the current price. Under this, GDP is calculated at a base year price.

For example: if we measure India’s National income of 2009-10 at 2001-2002 prices, then it is national income at a constant price.
This may give a misleading picture of economic growth of a country because an increase in National Income may be because of an increase in price rather than any physical output goods and services. On the other hand, this gives true picture of economic growth of a country as it is affected by the change in only the physical quantities.
National Income at current price = P1 × Q1 Where P1 – Current Price and Q1 – Current Quantity National Income at Constant Price = P0 × Q1 Where P0 – Base Year Price Q1 – Current Quantity

Real GDP is considered as an index of the welfare of the people. Welfare of the people is measured in terms of the availability of goods and services per person. Increase in real GDP means an increase in the level of output in the economy. Other things remaining constant, this means greater availability of goods per person. This leads to a higher level of welfare.

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