Final answer:
Nominal GDP increased because of the higher selling price for the smart TVs from year one to year two, while real GDP stayed the same since the quantity produced did not change.
Step-by-step explanation:
To answer the student’s question: In the given scenario, if a small economy produces only smart TVs and in year one 25,000 TVs are produced and sold at a price of $750 each, and in year two the same number of TVs is produced and sold at a higher price of $1,000 each, which of the following statements is true regarding real GDP and nominal GDP?
Nominal GDP is simply the total value of all finished goods and services produced in a country’s economy valued at current market prices during a specified period. To compute it for one year, you would multiply the number of items produced by their selling price for that year. Using the scenario, nominal GDP in year one would be 25,000 TVs × $750 = $18,750,000. For year two, it would be 25,000 TVs × $1,000 = $25,000,000. Therefore, nominal GDP increased from year one to year two because of the higher selling price per TV.
However, real GDP is adjusted for inflation and reflects the value of all goods and services at a constant price. Real GDP stays the same if the number of goods produced does not change and prices are adjusted to reflect a constant price level. Since the number of TVs produced did not change between the two years, real GDP would have stayed the same despite the change in price.
So, the correct answer to the student's question is that real GDP stayed the same.