Question

When shopping you notice that a pair of jeans costs $20 and a t-shirt costs $10. You compute the price of jeans relative to t-shirts. Which is the nominal and which is the real variable?

Answer 1

The cost of jeans ($20) and t-shirts ($10) are nominal prices, representing current prices without adjustments for inflation. In economics, Nominal GDP is not adjusted for inflation, while Real GDP is. In the provided context, we are comparing nominal values rather than real values.

Step-by-step explanation:

When comparing the price of a pair of jeans to a t-shirt, we are looking at relative price levels. The cost of the jeans, which is $20, and the cost of the t-shirt, $10, are both nominal prices because they represent current prices without adjustment for inflation or other factors. When we compute the price of jeans relative to t-shirts, we are considering their price in real terms, which adjusts for changes in purchasing power or inflation, but since there's no time comparison or adjustment mentioned, we are simply comparing nominal prices.

Applying this to a broader economic context, Nominal GDP is a measure of a country's economic output without inflation adjustments, whereas Real GDP is adjusted for inflation and reflects the actual quantity of goods and services produced. In your example, the nominal value is the stated price of the jeans and t-shirts, and the computation of the price of jeans relative to t-shirts doesn't involve a real variable unless you adjust for purchasing power parity or inflation.