Question

In 2018, the US nominal GDP was estimated to be $20.5 trillion dollars while the real GDP was estimated to be $18.64 trillion. Why is there a difference? Additionally, explain if GDP is a perfect measure of well-being.

Answer 1

Nominal GDP is calculated as the product of current output and current prices, Real GDP on the other hand is measured as the product of current output and base year prices. The nominal GDP is usually higher because in normal times, every country experiences some inflation (rise in prices). Since nominal GDP increases both because of an increase in output and an increase in prices, it is usually higher than real GDP which increases on;y sue to an increase in output.

No, GDP is not a perfect measure of well being. It is popular because it is objective while most welfare is subjective. One of the common criticisms of GDP is that it does not really represent the economic well being of the average citizen in the country if there is high inequality. GDP can grow even if only the top few % of the population see a major rise in their incomes but the vast majority of the population is not experiencing any gains. Thus, there is a shifting focus in qualitative growth rather than just quantitative growth. GDP also misses the finer aspects of well being such as education, health status, social inequality, gender inequality etc.