Why is real GDP a more accurate measure of the level of production in an economy than nominal GDP? Explain with an example

What will be an ideal response?


Consider an economy that produces only apples. If the price of apples in 2001 is $1 and the economy produces 10 apples, the nominal GDP of the economy is $10. Now, suppose in 2002, the price of apples doubles without any change in production. In this case, the nominal GDP of the economy in 2002 is $20. However, real GDP in both years is $10 if year 2001 is taken as the base year. So, according to real GDP, output has not changed between the two years. Hence, the real GDP, which accounts for inflation, is a more accurate measure of the level of production than nominal GDP.

Economics

You might also like to view...

Which of the following statements correctly indicates a property of good economic questions?

A) A good economic question addresses topics that are important to economic agents and/or to the society. B) A good economic question must always include arithmetic calculations and graphical solutions. C) A good economic question should always be positive and not normative. D) A good economic question should always be easy to answer.

Economics

If an industry has constant marginal and average costs, any shift in demand will eventually

A) result in a higher equilibrium price. B) be met by a smaller change in quantity supplied. C) be met by an equal change in quantity supplied, and equilibrium price will not change. D) make economic profits zero in the short run.

Economics

The firm whose short-run cost curves are given in Exhibi has a long-run fixed cost of

A. $0. B. $2. C. $3. D. $4.

Economics

Knowledge workers are becoming more common relative to production workers

Indicate whether the statement is true or false

Economics