Measuring the performance of the economy using real GDP is better than using nominal GDP because, in the former, adjustments are made to compensate for any changes in the price level. Real GDP is, therefore, a better index for measuring the output of an economy because it takes into account any fluctuations (inflation effects) in the value of goods and services produced.
It is imperative to note that real GDP provides the best measure for the value of a country’s economic output because it has been adjusted for changes in the prices. Nominal GDP, therefore, acts as an index that represents the quantity of the total output implying that its assessment of growth is not realistic. With its use, a county may seem as if it is producing increased quantities whereas, in the real sense, it is the prices that have gone up.
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In most cases, GDP is normally reported in the nominal form, implying that it includes both growth and prices whereas real GPD represents pure growth only. In a base year, there are no price changes that are accounted for when calculating nominal GDP, thus illustrating why the latter is always higher than the former. Whereas nominal GDP uses the current prices of goods and services in the economy, real GDP uses constant values of base year prices.
The implication here is that the spending for a nation may increase either as a result of an increase in the output of goods and services or an increase in their prices. Economists are normally interested in knowing whether the output has changed and not the prices. They, therefore, tend to use real GDP because it values the output using fixed prices (in other words, it is not affected by price changes over time). From the discussion provided above, it is therefore evident that real GDP provides a better measure of the economic performance as opposed to nominal GDP.
