Economics Business Cycles Questions
The limitations of using nominal GDP as an economic indicator include:
1. Inflation distortion: Nominal GDP does not account for changes in the general price level, so it can be distorted by inflation. If prices increase over time, nominal GDP may appear to be growing when in reality it is just reflecting higher prices.
2. Currency fluctuations: Nominal GDP is measured in the currency of a particular country, so it can be affected by exchange rate fluctuations. Changes in exchange rates can distort the value of GDP when comparing it across different time periods or countries.
3. Quality of goods and services: Nominal GDP does not consider changes in the quality of goods and services produced. If there are improvements in the quality of products, but prices remain the same, nominal GDP may not accurately reflect the increase in economic well-being.
4. Underground economy: Nominal GDP may not capture economic activities that occur in the underground economy, such as illegal activities or unreported income. This can lead to an underestimation of the true economic output.
5. Income distribution: Nominal GDP does not provide information about how income is distributed among different segments of the population. It does not capture disparities in wealth or income inequality, which are important factors in assessing the overall well-being of a society.
Overall, while nominal GDP is a useful measure for assessing the size of an economy, it has limitations in accurately reflecting changes in real economic output, quality of goods and services, currency fluctuations, underground economy, and income distribution.