If nominal GDP rises while real GDP remains constant, what can be said about welfare?
Answer and explanation
Correct answer: The rise may be due only to prices, so real welfare need not increase
Nominal GDP values current production at current prices, whereas real GDP removes the effect of price changes by using constant or base-year prices. If nominal GDP rises but real GDP is unchanged, the increase may be entirely inflationary. There is no evidence that the quantity of goods and services, purchasing power, or welfare has improved; option B therefore follows.
Frequently asked questions
What is the correct answer to this question?
The rise may be due only to prices, so real welfare need not increase
Why is this the correct answer?
Nominal GDP values current production at current prices, whereas real GDP removes the effect of price changes by using constant or base-year prices. If nominal GDP rises but real GDP is unchanged, the increase may be entirely inflationary. There is no evidence that the quantity of goods and services, purchasing power, or welfare has improved; option B therefore follows.
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.
