Question

Economists prefer to compare Real GDP figures for different years instead of comparing GDP figures. Why?

Short answer

Economists prefer to compare Real GDP figures because it eliminates the effects of inflation and presents a more accurate picture of a country's economic growth or contraction.

Step-by-step solution

Understanding GDP

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. It serves as a comprehensive scorecard of a country’s economic health.

Understanding Real GDP

Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices, often used to compare the economic growth of countries. Real GDP is a 'constant dollar' figure without the impacts of inflation or deflation.

Reason for Comparing Real GDP

Economists prefer comparing 'Real GDP' figures for different years because it allows for the comparison of economic output from one year to another, taking into account the effects of inflation. Comparing Real GDP figures essentially allows economists to draw conclusions about the growth or contraction of an economy, eliminating the distortion caused by inflation or deflation. Comparing nominal GDP figures could be misleading because they can be inflated by price increases rather than actual growth.