A country's nominal GDP rose by 12% while prices rose by 8%. Approximately how much did real output rise?
Answer and explanation
Correct answer: About 4%
Nominal GDP reflects both changes in prices and changes in the quantity of output. For a quick approximate calculation, real GDP growth is nominal GDP growth minus the inflation rate: 12% − 8% = 4%. The exact rate using the GDP relationship is (1.12/1.08 − 1) × 100, about 3.7%, which rounds to approximately 4%. Therefore C is correct; adding the rates would wrongly double-count inflation.
Frequently asked questions
What is the correct answer to this question?
About 4%
Why is this the correct answer?
Nominal GDP reflects both changes in prices and changes in the quantity of output. For a quick approximate calculation, real GDP growth is nominal GDP growth minus the inflation rate: 12% − 8% = 4%. The exact rate using the GDP relationship is (1.12/1.08 − 1) × 100, about 3.7%, which rounds to approximately 4%. Therefore C is correct; adding the rates would wrongly double-count inflation.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
