The GDP deflator is a measure of the average level of prices of all new, domestically produced, final goods and services in an economy. It is calculated as the ratio of nominal GDP to real GDP, multiplied by 100. A base year is chosen, and its deflator value is set to 100. We need to understand what a deflator value less than 100 signifies.
D) Fallen (deflation relative to the base year) — A GDP deflator value of 95, being less than the base year's 100, directly indicates that the general price level has decreased, which is deflation.
This question asks for the formula to calculate Real GDP from Nominal GDP using the GDP deflator. Understanding the definitions of these terms is crucial.
This formula correctly adjusts Nominal GDP for price changes to arrive at Real GDP.
Correct Option: D) Real GDP = (Nominal GDP / GDP deflator) × 100
This question tests the understanding of the difference between Nominal GDP and Real GDP. The key is to remember that Real GDP measures the physical quantity of goods and services produced, adjusted for price changes, while Nominal GDP reflects current market prices.
C) Remain unchanged — Real GDP is a measure of the physical volume of goods and services produced. If the physical quantity of output is completely unchanged, then by definition, Real GDP will remain unchanged, regardless of what happens to prices or Nominal GDP.
This question tests the understanding of Nominal GDP and Real GDP, which are key macroeconomic indicators. The core difference lies in how prices are accounted for in their calculation.
B) Nominal GDP can increase even when actual production declines, due to a rise in prices. This statement is correct because Nominal GDP is calculated using current prices. If prices increase significantly, the monetary value of goods and services produced can rise, even if the actual quantity of goods and services produced (real production) has decreased or remained constant.
This question asks about the relationship between Nominal GDP and Real GDP during a period of inflation. Understanding the definitions of these two GDP measures and how inflation affects them is key to answering this question.
D) Nominal GDP exceeds Real GDP — During inflation, current prices are higher than base-year prices. Since Nominal GDP uses current prices and Real GDP uses base-year prices, the monetary value of output will be higher when calculated at current, inflated prices compared to constant, base-year prices, assuming the quantity of goods and services produced is the same or has increased. Thus, Nominal GDP will exceed Real GDP.
The question asks to identify the key difference between the GDP deflator and the Consumer Price Index (CPI). Both are measures of inflation, but they differ in their scope and the types of goods and services they include.
It is a 'Paasche index' because the basket of goods changes every year to reflect current production patterns.
B) Covers all final goods and services produced domestically, not just a fixed consumer basket
This statement accurately describes the main difference. The GDP deflator is a much broader measure, encompassing all final goods and services produced within the domestic economy (GDP components), whereas the CPI is limited to a fixed basket of goods and services consumed by households.