In an economy experiencing a persistently falling price level:
A. Potential GDP will necessarily exceed actual GDP.
B. Changes in nominal GDP may either overstate or understate changes in real GDP.
C. Changes in nominal GDP understate changes in real GDP.
D. Changes in nominal GDP overstate changes in real GDP.
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Real versus nominal GDP
Consider a simple economy that produces two goods: apples and muffins. The following table shows the prices and quantities of the goods over a three-year period.
| Year |
Apples |
Muffins |
||
|---|---|---|---|---|
| Price | Quantity | Price | Quantity | |
| (Dollars per apple) | (Number of apples) | (Dollars per muffin) | (Number of muffins) | |
| 2008 | 1 | 150 | 2 | 160 |
| 2009 | 2 | 135 | 4 | 230 |
| 2010 | 3 | 110 | 4 | 165 |
Use the information from the previous table to fill in the following table.
| Year | Nominal GDP | Real GDP |
|---|---|---|
| (Dollars) | (The base year 2008, dollars) | |
| 2008 | ||
| 2009 | ||
| 2010 |
1. From 2009 to 2010, nominal GDP (decreased or increased), and real GDP (decreased or increased).
2. Why is real GDP a more accurate measure of an economy's production than nominal GDP?
A. Real GDP measures the value of the goods and services an economy produces, but nominal GDP measures the value of the goods and services an economy consumes.
B. Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not.
C. Real GDP is not influenced by price changes, but nominal GDP is.
Real versus nominal GDP
Consider a simple economy that produces two goods: apples and oranges. The following table shows the prices and quantities for the goods over a three-year period.
| Year |
Apples
|
Oranges
|
||
|---|---|---|---|---|
| Price | Quantity | Price | Quantity | |
| (Dollars per apple) | (Number of apples) | (Dollars per orange) | (Number of oranges) | |
| 2010 | 1 | 120 | 1 | 195 |
| 2011 | 2 | 130 | 4 | 195 |
| 2012 | 4 | 130 | 4 | 145 |
A. Use the information from the previous table to fill in the following table.
| Year | Nominal GDP | Real GDP | GDP Deflator |
|---|---|---|---|
| (Dollars) | (Base year 2010, Dollars) | ||
| 2010 | |||
| 2011 | |||
| 2012 |
B. From 2011 to 2012, change in nominal GDP is __________, and real GDP is ________.
C. The inflation rate in 2012 was ____________.
D. Why is real GDP a more accurate measure of an economy's production than nominal GDP?
a. Real GDP does not include the value of intermediate goods and services, but nominal GDP does.
b. Real GDP includes the value of exports, but nominal GDP does not.
c. Real GDP is not influenced by price changes, but nominal GDP is.
