‘‘Higher Gross Domestic Product (GDP) means greater per capita availability of goods in the economy.’’ Do you agree with the given

statement? Give valid reason in support of your answer.

OR

Explain the meaning of Real Gross Domestic Product and Nominal Gross Domestic Product, using a numerical example.

I do not agree with the given statement. With the increase in the gross domestic product, the availability of goods and services also increases. However, we cannot say that the per capita availability of goods in the economy increases with an increase in the GDP. This is possible only when the other factors which affect the Welfare are assumed to be constant. GDP as an index of the welfare of the economy is insufficient. The following points support my answer:

a. The composition of the output produced that has led to an increase in the GDP should be considered to know whether or not GDP has to lead to an increase in the Welfare of the economy. For example, war materials such as guns and high-end luxurious products do not add any will to the welfare of the majority of the population.

b. GDP only considers monetary transactions. In many less developed countries, transactions take place in the rural and the household sector in terms of nonmonetary value. These are not within the purview of GDP which leads to a wrong estimation of its value.

c. The increase in the GDP may also be as a result of the increase in the income of just a few individuals. A majority of the citizens might not be able to gain benefit from the rise in GDP.

d. If the growth rate of the population is more than the growth rate of the GNP, then the per capita GDP and the economic welfare will fall even with the increase in the output.

e. The government on Defence is termed as nondevelopment expenditure. This leads to an increase in the national income but does not lead to any form of increase of the Welfare of the masses.

OR

Real Gross Domestic Product refers to the money value of all the final goods and services produced in a year. They are measured as the price of the base year. It is also used to compare the GDP of different years. It is considered to be a better tool to measure the Welfare of the economy. Its value can change only when the quantity of output changes over time

Real GDP= Base year price P0 X current quantity QO

Nominal Gross Domestic Product refers to the money value of all the final goods and services produced in a year. They are measured as the price of the current year. It is not considered to be a good tool for measuring the Welfare of a country not to measure and compare the GDP of different years. Its value can change only when the price changes over time.

Nominal GDP = Current year price X Quantity

Let us assume that in an economy only one good is produced X.

The following table has been constructed of the year 2010. 1000 units are produced, the current year price is 100 and the base year price is 50.

Real GDP= Base year price P0 X current quantity QO

= 50 * 1000 = 50000

Nominal GDP = Current year price X Quantity

= 100 * 1000

= 100000