If nominal GDP is rising faster than real GDP, what can be a possible reason?
Answer and explanation
Correct answer: An increase in the general price level
Nominal GDP values current production at current prices, so it can rise because of higher output, higher prices, or both. Real GDP values production at constant base-year prices and therefore removes the effect of price changes. If prices increase while physical output grows more slowly, nominal GDP will rise faster than real GDP. This is why inflation is a possible explanation.
Frequently asked questions
What is the correct answer to this question?
An increase in the general price level
Why is this the correct answer?
Nominal GDP values current production at current prices, so it can rise because of higher output, higher prices, or both. Real GDP values production at constant base-year prices and therefore removes the effect of price changes. If prices increase while physical output grows more slowly, nominal GDP will rise faster than real GDP. This is why inflation is a possible explanation.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates.
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