Question

To what degree does real GDP measure to health of an economy? How is it possible to make valid international comparisons of real GDP? Support your answer with examples.

Answer 1

GDP or gross domestic product is a measure of value of economic output. Real GDP adjust the GDP figures for price changes due to inflation or deflation.

Forge. Suppose a country's GDP increased by 10% in the current fiscal. Its inflation stood at 5%. This means that half of the increase in GDP is accounted for increase in prices due to rise in inflation. Real GDP, in this case will be GDP - Inflation = 10% - 5% = 5%. This means that after negating the effect of price rise, the value of economic output increased by 5%.

So real GDP is a more practical measure of the health of an economy.

International comparisons of real GDP can be made by using metrics like real GDP per capita. Tke the case of 2 countries like USA and Japan. For example's sake assume, USA's real GDP is $5 million and its population is 1 million. Thus real GDP per capita for USA is $5. (Real GDP divided by population)

Assume Japan's population to be 5 million and its real GDP to be also $5 million. Its real GDP per capita will be $1 (real GDP divided by population).

Thus, although both Japan and USA have the same real GDP, the real GDP per capita for USA is much higher than Japan.