question_answer

Distinguish between 'real' gross domestic product and 'nominal' gross domestic product. Which of these is a better index of welfare of the people and why?

Or

Distinguish between stocks and flows. Give two examples of each.

 

Answer:

The difference are as follows:
	Real GDP		Nominal GDP
1.	Real GDP refers to the total market value of the output at the base year prices	1.	Nominal GDP refers to the total market value of the output at the current year prices.
2.	The value of real GDP can change only when the volume quantity of output changes overtime.	2.	The value of nominal GDP can change only with change in the prices over time.
3.	It can be treated as an index of economic growth i.e. higher real.	3.	It cannot be treated as a index of economic growth i.e. higher economic growth, in fact, it may indicates inflation.
Real GDP is a better index of economic welfare. This is because a change in the Real GDP reflects a change in the quantity of goods and services produced. The change in the production of goods and services implies a change in the employment and income levels, thereby, indicating a change in the living standards of the people in an economy.
Or
	Stock		Flow
1.	Stock are related to a point of time.	1.	Flow are related to a period of time.
2.	Stock is not time dimensional.	2.	Flow is time dimensional.
3.	These are affected by flow, such as more saving leads to more stock of capital.	3.	These are affected by stocks, such as, more stock of capital leads to more volume of output.
4.	Some flows are related to stock, i.e., money supply and change in money supply.	4.	Some stock are related to flows, i.e., flow of water and quantity of water in a tank.
5.	Examples: Wealth, stock of capital, etc.	5.	Examples: Raw material, fuel, etc.