If nominal GDP rises by twelve percent but the price level rises by ten percent, what can be said about real growth?
Answer and explanation
Correct answer: Real growth is much lower than nominal growth
The governing concept is the distinction between nominal GDP and real GDP. Nominal GDP reflects both changes in quantities and prices, whereas real GDP removes the price effect. Using the approximate relation, real growth is about 12% − 10% = 2%; the exact rate would be 1.82% if the price index rose by 10%. Therefore, real growth is positive but much lower than nominal growth, making B the best option.
Frequently asked questions
What is the correct answer to this question?
Real growth is much lower than nominal growth
Why is this the correct answer?
The governing concept is the distinction between nominal GDP and real GDP. Nominal GDP reflects both changes in quantities and prices, whereas real GDP removes the price effect. Using the approximate relation, real growth is about 12% − 10% = 2%; the exact rate would be 1.82% if the price index rose by 10%. Therefore, real growth is positive but much lower than nominal growth, making B the best option.
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.
