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Consider the following statements:
1. Real GDP changes express changes in production output in the country.
2. A nominal GDP increase necessarily means that the production output has increased.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
Verified Answer
Consider the following statements:1. Real GDP changes express changes ...
- While calculating GDP, if prices change, then there may be difficulties in comparing GDPs. If we measure the GDP of a country in two consecutive years and see that the figure for the GDP of the latter year is twice that of the previous year, we may conclude that the volume of production of the country has doubled. But it is possible that only prices of all goods and services have doubled between the two years whereas the production has remained constant.
- Therefore, in order to compare the GDP figures (and other macroeconomic variables) of different countries or to compare the GDP figures of the same country at different points of time, we cannot rely on GDPs evaluated at current market prices. For comparison, we take the help of real GDP. Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or constant prices). Since these prices remain fixed, if the Real GDP changes we can be sure that it is the volume of production that is undergoing changes. An increase in real GDP implies an increase in the production of goods and services. Hence, statement 1 is correct.
- Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices. Hence, it may happen that the numbers of nominal GDP have increased due to price rise and not necessarily due to production increase. Actually, production may have remained constant or decreased in an economy but due to price rise, the nominal GDP figures may have improved. Hence, statement 2 is not correct.
Most Upvoted Answer
Consider the following statements:1. Real GDP changes express changes ...
Explanation:
1. Real GDP changes express changes in production output in the country:
- Real GDP measures the total value of all final goods and services produced within a country's borders, adjusted for inflation.
- Changes in real GDP reflect changes in production output, as it accounts for inflation and provides a more accurate picture of an economy's performance.
- Therefore, the statement that real GDP changes express changes in production output in the country is correct.
2. A nominal GDP increase necessarily means that the production output has increased:
- Nominal GDP measures the total value of all goods and services produced within a country's borders without adjusting for inflation.
- An increase in nominal GDP does not necessarily mean that production output has increased, as it could be due to price increases rather than actual growth in output.
- Therefore, the statement that a nominal GDP increase necessarily means that the production output has increased is incorrect.
Therefore, option 'A' - "1 only" is the correct answer.
1. Real GDP changes express changes in production output in the country:
- Real GDP measures the total value of all final goods and services produced within a country's borders, adjusted for inflation.
- Changes in real GDP reflect changes in production output, as it accounts for inflation and provides a more accurate picture of an economy's performance.
- Therefore, the statement that real GDP changes express changes in production output in the country is correct.
2. A nominal GDP increase necessarily means that the production output has increased:
- Nominal GDP measures the total value of all goods and services produced within a country's borders without adjusting for inflation.
- An increase in nominal GDP does not necessarily mean that production output has increased, as it could be due to price increases rather than actual growth in output.
- Therefore, the statement that a nominal GDP increase necessarily means that the production output has increased is incorrect.
Therefore, option 'A' - "1 only" is the correct answer.
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Consider the following statements:1. Real GDP changes express changes in production output in the country.2. A nominal GDP increase necessarily means that the production output has increased.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?
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