Why is real GDP considered a better measure of economic growth than nominal GDP?

Why is real GDP considered a better measure of economic growth than nominal GDP?

Real GDP is considered a better measure of economic growth than nominal GDP because it takes into account changes in the price level, providing a more accurate reflection of the actual increase in production and economic activity. Nominal GDP, on the other hand, only measures the total value of goods and services produced in current prices, without adjusting for inflation or changes in the purchasing power of money.

By adjusting for inflation, real GDP allows for a more meaningful comparison of economic performance over time. It enables economists and policymakers to analyze changes in output and productivity, as well as to assess the standard of living and welfare of a country's population. Real GDP also helps in identifying periods of economic expansion or contraction, as it filters out the effects of price changes.

Additionally, real GDP allows for international comparisons of economic growth, as it eliminates the influence of exchange rate fluctuations. This is particularly important when comparing countries with different currencies or experiencing different inflation rates.

In summary, real GDP provides a more accurate measure of economic growth by accounting for changes in the price level, allowing for meaningful comparisons over time and across countries. It is a crucial tool for understanding and analyzing the overall health and performance of an economy.