Question

If nominal GDP in one year is $5,000 billion and the price index is 135, then the real GDP that year would be $3,704 billion.

a) True

b) False

Answer 1

The statement is essentially true, as the calculated real GDP of approximately $3,704 billion is derived correctly from the provided data. The formula to calculate real GDP is Nominal GDP divided by the price index (in this example divided by 135 and then multiplied by 100), which adjusts for inflation. The correct option is A.

Step-by-step explanation:

The statement is false. To calculate the real GDP, we adjust the nominal GDP by the price index (GDP deflator). The formula to calculate real GDP is given by:

Real GDP = Nominal GDP
/ (Price Index / 100)

Using the given numbers, the real GDP calculation would be:

Real GDP = $5,000 billion
/ (135 / 100)
= $5,000 billion / 1.35
= $3,703.7 billion

Since the result of $3,703.7 billion is approximately equal to $3,704 billion, the initial statement is essentially accurate despite the slight rounding difference. However, the principle is important to understand. It shows that to compare economic growth over time, real GDP is used rather than nominal GDP because it accounts for inflation.