Question

Here is a chart showing both nominal and real GDP growth for a country. Which of the following can be a true statement?

a) Nominal GDP is always higher than real GDP
b) Real GDP accounts for inflation
c) Nominal GDP accounts for inflation
d) Real GDP is always higher than nominal GDP

Answer 1

The correct statement is b) Real GDP accounts for inflation. Nominal GDP represents the total value of goods and services produced in an economy at current market prices, while real GDP adjusts for inflation by using constant prices from a base year.

Step-by-step explanation:

The correct statement is b) Real GDP accounts for inflation. Nominal GDP represents the total value of goods and services produced in an economy at current market prices, while real GDP adjusts for inflation by using constant prices from a base year. Real GDP is considered a more accurate measure of economic growth because it eliminates the impact of inflation, allowing for a better comparison of economic performance over time.

For example, if a country's nominal GDP increases by 5% from one year to the next, but inflation during that period is 3%, the real GDP growth would be 2% (5% - 3%). This adjustment accounts for the fact that prices have increased, so the increase in nominal GDP may not reflect true economic growth.

It's important to understand the difference between nominal and real GDP when analyzing economic data and making comparisons across different time periods or countries.