Final answer:
To calculate the change in real GDP over five years, given nominal GDP and the GDP price index, use the formula Real GDP = Nominal GDP / (GDP Price Index / 100). With the provided data, real GDP increased from $380 billion in the base year to $400 billion after five years, reflecting an actual increase in economic output.
Step-by-step explanation:
The question at hand involves understanding the difference between nominal GDP and real GDP, which is a core concept in economics. Specifically, it asks about how real GDP has changed over a five-year period, given the nominal GDP and the GDP price index for a base year and a subsequent year. To answer this, one must calculate the real GDP in the subsequent year by adjusting the nominal GDP to account for the changes in price levels, which is done using the GDP price index.
Calculation of Real GDP
To find the real GDP for the subsequent year, we use the formula: Real GDP = Nominal GDP / (GDP Price Index / 100). Inserting the given values:
- Nominal GDP (5 years later): $480 billion
- GDP Price Index (5 years later): 120
So, Real GDP = $480 billion / (120 / 100) = $480 billion / 1.2 =
$400 billion
.
Comparing Real and Nominal GDP
In the base year, the nominal and real GDP are identical because the GDP price index is set to 100. This means that there have been no price changes that would otherwise affect the purchasing power of the currency used to measure GDP. Over time, however, the price index typically changes, which is why adjustments are needed to determine the real GDP, reflecting the actual economic output irrespective of inflation or deflation.
Therefore, based on the given data, after adjusting for inflation, the real GDP has increased from $380 billion in the base year to $400 billion five years later. This indicates that the production of goods and services has actually increased in volume, separate from any price changes that have occurred during that time.