This question asks for the approximate growth rate of Real GDP given the growth rate of Nominal GDP and the GDP deflator (inflation). The relationship between Nominal GDP growth, Real GDP growth, and inflation is fundamental in macroeconomics. We will use the approximation formula for growth rates.
C) About 4% — This is the result obtained by subtracting the inflation rate from the nominal GDP growth rate.
To calculate Real GDP (at base-year prices), we need to use the quantity of goods produced in the current year and the prices of those goods from the base year. This method removes the effect of inflation, allowing us to see the actual change in the volume of production.
Real GDP for the current year is calculated by multiplying the quantity produced in the current year by the prices of the base year.
\[ \text{Real GDP (Current Year)} = Q_1 \times P_0 \]\[ \text{Real GDP (Current Year)} = 120 \text{ units} \times \text{₹}10/\text{unit} \]\[ \text{Real GDP (Current Year)} = \text{₹}1,200 \]Correct Option: C) ₹1,200 is the current-year Real GDP (at base-year prices) because it reflects the current year's production valued at base-year prices, thus removing the effect of price changes.
The GDP deflator is a measure of the overall price level 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. Nominal GDP is the value of goods and services at current prices, while real GDP is the value of goods and services at base year prices.
Nominal GDP for the current year is calculated by multiplying the quantity of goods produced in the current year by their current year prices.
\[ \text{Nominal GDP (Current Year)} = \text{Quantity (Current Year)} \times \text{Price (Current Year)} \]\[ = 120 \text{ units} \times \text{₹}15/\text{unit} = \text{₹}1800 \]Real GDP for the current year is calculated by multiplying the quantity of goods produced in the current year by their base year prices.
\[ \text{Real GDP (Current Year)} = \text{Quantity (Current Year)} \times \text{Price (Base Year)} \]\[ = 120 \text{ units} \times \text{₹}10/\text{unit} = \text{₹}1200 \]The GDP deflator is calculated using the formula:
\[ \text{GDP Deflator} = \left( \frac{\text{Nominal GDP}}{\text{Real GDP}} \right) \times 100 \]\[ = \left( \frac{\text{₹}1800}{\text{₹}1200} \right) \times 100 \]\[ = 1.5 \times 100 = 150 \]B) The GDP deflator for the current year is 150. This indicates that the overall price level has increased by 50% compared to the base year.
The question asks to identify which statement is NOT a feature of Real GDP. To answer this, we need to understand the definition and purpose of Real GDP, especially how it differs from Nominal GDP.
D) It rises automatically whenever the general price level rises. This statement is incorrect because Real GDP is adjusted for inflation (measured at constant prices), so it does not automatically increase with a rise in the general price level. This describes Nominal GDP.
The question asks why 'per capita real income' is a better welfare indicator than 'per capita nominal income'. This requires understanding the fundamental difference between real and nominal economic measures, particularly concerning inflation and purchasing power.
A) Reflects changes in real purchasing power by adjusting for price changes. This is the correct answer. Real income is calculated by deflating nominal income using a price index (like the Consumer Price Index or GDP deflator). This adjustment removes the effect of inflation, providing a clearer picture of the actual quantity of goods and services an individual can purchase. Thus, it accurately reflects changes in their economic welfare or standard of living.
The question asks why the GDP deflator is considered an 'implicit' price index. This requires understanding the definition and calculation method of the GDP deflator and contrasting it with other price indices like the Consumer Price Index (CPI).
B) Derived as a by-product of comparing nominal and real GDP rather than from a pre-fixed basket. This statement accurately describes why the GDP deflator is considered an 'implicit' price index. It is not constructed from a fixed basket of goods like CPI or WPI; rather, it emerges from the ratio of nominal to real GDP, reflecting the prices of all goods and services produced in the economy in a given period.