Question

Discuss how economists compare nominal income of a country in a particular year to the previous year to examine economic growth.

Answer 1

Nominal income is the income received by an individual measured over a period of time. It can be an hour, a week, a month or an year. Nominal income is the product of current year production and the current year price. Thus Nominal GDP is the money value of final goods and services produced within a domestic boundary of an economy in an accounting period at current yeasr's prices. It is also known as GDP at current price. It changes due to change in production or current years price. It does not show true and fair picture of the economic growth.

Nominal income can increase without any increase in physical output and it doesnot eliminate the effect of change in price. Nominal income can be adjusted to control inflation because inflation reduces ones affordability of goods and services at a particular nominal income.

To compare nominal income of two adjacent years, take an example that the nominal income of a particular year is increased by 50% when compared to the last year. Thus people can afford more and more products as compared to the last year. Due to this, an individual will have advantage only if prices had changed by less than 50% within that year. Thus the nominal income is nat varied according to the living cost due to the problem of inflation. Thus nominal income cannot be taken into account for measuring the economic growth of a nation.

Thanks!..