Real GDP and Nominal GDP

Correct answer: A. It will rise by about 12 percent

Explanation: Nominal GDP measures the value of current output at current prices, so it changes when prices change even if the physical quantity of output is unchanged. With quantity constant and prices rising by 12%, nominal GDP rises by approximately 12% as well. Thus option A is correct. Real GDP would remain unchanged in this situation because it uses constant prices.

Correct answer: A. Both will fall

Explanation: Nominal GDP is calculated using current prices, while real GDP is calculated using constant base-year prices. When prices remain unchanged, both measures respond to the change in output quantity. Therefore, a fall in output reduces both nominal GDP and real GDP, making option A correct. A difference between their movements generally arises when prices change.

Correct answer: C. It will remain unchanged

Explanation: Real GDP measures the value of current output using fixed base-year prices, so it reflects changes in physical production rather than changes in current prices. Since output remains constant, the quantity valued at base-year prices also remains constant. Therefore, a fall in current prices changes nominal GDP but does not change real GDP. Option A, B, and D incorrectly treat real GDP as if it used current prices.

Correct answer: A. It includes the effect of price changes

Explanation: Nominal GDP values goods and services at the prices prevailing in the same year. Consequently, it can increase because the economy produces more goods, because prices rise, or because of both changes together. This makes it unsuitable for measuring pure growth in physical output across years. Real GDP uses base-year prices to remove the price effect. Thus, option A is correct; the other options make false claims about what GDP measures.

Correct answer: A. It uses constant prices

Explanation: Real GDP values the output of each year at prices from a selected base year. Holding prices constant removes the effect of inflation or deflation, so changes in the measure mainly represent changes in the quantity of goods and services produced. This makes comparisons across years meaningful. Nominal GDP, in contrast, uses current prices and mixes price changes with output changes. Therefore, option A is correct.

Correct answer: C. ₹3,000

Explanation: Nominal GDP measures current production using current-year prices. Therefore, multiply the number of units produced by the current price per unit: Nominal GDP = 150 × ₹20 = ₹3,000. Hence, option C is correct. The base-year price is not relevant because the question asks for nominal GDP; using any other price or adding the figures would produce an incorrect result.

Correct answer: B. ₹2,400

Explanation: Real GDP values the quantity produced at base-year prices rather than current prices. The required calculation is: Real GDP = quantity produced × base-year price per unit = 150 × ₹16 = ₹2,400. Thus, option B is correct. Using ₹20, if it were a current price, would give ₹3,000 and would represent nominal GDP, not real GDP. The key distinction is which price is used.

Correct answer: C. ₹5,400

Explanation: Nominal GDP is calculated by valuing current-year output at the current-year price. The relevant figures are 300 units and ₹18 per unit; the base-year price of ₹15 is used for real GDP instead. Thus, Nominal GDP = 300 × ₹18 = ₹5,400. Therefore, option C is correct. ₹4,500 is the real GDP obtained by using the base-year price, so it is a plausible but incorrect distractor.

Correct answer: A. ₹4,500

Explanation: Real GDP uses the current year's quantity but values it at the base-year price. Therefore, Real GDP = 300 units × ₹15 per unit = ₹4,500. Option A is correct. The amount ₹5,400 results from multiplying by the current price of ₹18, so it is nominal GDP rather than real GDP. This question tests the essential rule: fixed base-year prices are used to remove the price effect.

Correct answer: B. 6 percent

Explanation: The governing concept is the distinction between nominal GDP, which reflects both output and prices, and real GDP, which removes price effects. Using the approximate relationship, nominal GDP growth ≈ real GDP growth + price growth. Therefore, price growth ≈ 14% − 8% = 6%. Hence option B is correct; 4% and 8% do not give the required difference, while 22% incorrectly adds both rates.

Correct answer: C. 12 percent

Explanation: Nominal GDP measures current-price value, so its growth reflects both the growth of real output and the change in the price level. For the simple approximation used here, nominal GDP growth ≈ real GDP growth + price growth. Thus, 9% + 3% = 12%. Option C is correct. Option A subtracts the rates, option B ignores price change, and option D adds them incorrectly.

Correct answer: A. The price level has risen

Explanation: Real GDP holds prices constant and therefore tracks changes in the quantity of output, whereas nominal GDP changes with both quantity and prices. If real GDP is unchanged, output is unchanged in real terms. A rise in nominal GDP must therefore come from higher prices, meaning the price level has risen. Option A is correct; option B conflicts with unchanged real output, and option D would reduce nominal GDP.

Correct answer: A. Prices have fallen

Explanation: Real GDP rises when the quantity of goods and services increases after removing price effects. Nominal GDP, however, equals prices multiplied by quantities. If quantity rises but nominal GDP stays unchanged, prices must have fallen enough to offset the larger output value. Therefore option A is correct. A price rise would increase nominal GDP, and a fall in output contradicts the premise.

Correct answer: A. Sharp rise in prices

Explanation: Real GDP falls when the physical quantity of final goods and services decreases, while nominal GDP can still rise if current prices increase sufficiently. Thus, a sharp price rise can more than offset the fall in output and raise the money value of production. Option A is correct. A price fall would reduce nominal GDP, and a rise in output conflicts with falling real GDP; a base-year change alone is not the necessary explanation.

Correct answer: A. Sufficient fall in prices

Explanation: An increase in real GDP means that the quantity of output has increased after removing price effects. Nominal GDP can nevertheless fall if the price level decreases so substantially that the price decline outweighs the increase in quantity. Therefore option A is correct. A price rise would normally push nominal GDP upward, while lower or zero output would not produce a rise in real GDP.

Correct answer: A. Real GDP per capita = Real GDP ÷ Population

Explanation: Per capita means “per person,” so the total measure must be divided by the number of people. The correct formula is real GDP per capita = real GDP ÷ population. Real GDP is used to remove the effect of price changes, while population is the denominator. Thus option A is correct. Multiplication, reversing the fraction, or subtracting population does not produce an average output value per person.

Correct answer: C. ₹6,000

Explanation: The governing formula is real GDP per capita = real GDP ÷ population. Substituting the given values gives ₹72,000 crore ÷ 12 crore = ₹6,000 per person. The word “crore” cancels because it appears in both quantities, so the result is a rupee amount per person. Therefore option C is correct; ₹4,000, ₹5,000, and ₹7,200 result from incorrect division or calculation.

Correct answer: B. 5 percent

Explanation: Real GDP per capita equals real GDP divided by population. For small percentage changes, the approximate growth rate of a ratio is the numerator’s growth minus the denominator’s growth. Hence per-capita real GDP growth ≈ 8% − 3% = 5%. Option B is correct. Option C ignores population growth, option A uses only population growth, and option D incorrectly adds the two rates.

Correct answer: A. It will fall by about 2 percent

Explanation: The governing concept is real GDP per capita, calculated as real GDP divided by population. Using the approximate growth rule, per-capita growth is output growth minus population growth: 2% − 4% = −2%. Thus, real GDP per person falls by about 2%, so option A is correct. Option B reverses the comparison, option C adds the rates, and option D ignores population growth.

Correct answer: A. To reflect the current structure of the economy

Explanation: A base year supplies the reference prices used to calculate real GDP and price indices. Consumption patterns, production methods, product availability and the relative importance of sectors change over time. Periodic revision therefore makes the constant-price series more representative of the present economy. Option A is correct; the other choices describe outcomes unrelated to national accounting and do not explain base-year revision.

Correct answer: A. The prices used for valuation

Explanation: Real GDP values current-period quantities at prices from a selected base year. When the base year is changed, the reference or constant-price set changes, so the valuation of output changes. The observed current-year quantity does not automatically change, nor do the country’s boundaries or the population definition. Therefore option A is correct, while B, C and D confuse prices with quantities or unrelated statistical definitions.

Correct answer: C. Both are equal

Explanation: In the base year, the prices used to calculate nominal GDP are the same as the prices used to calculate real GDP, because real GDP uses base-year prices. Thus, for the same quantities, both measures produce the same value. Option C is correct. Nominal GDP is not necessarily higher, and neither measure is automatically zero in the base year.

Correct answer: B. Twelve hundred rupees

Explanation: Nominal output is calculated by valuing the current quantity at the current price. Here, current quantity is 20 units and current price is ₹60. Thus, nominal output value = 20 × ₹60 = ₹1,200. Option B is correct. ₹1,000 would use the base-year price of ₹50 and would represent the real output value, while the other options do not follow the required multiplication.

Correct answer: B. Ten percent

Explanation: The percentage-growth rule uses last year’s real GDP as the base. The increase is ₹880 crore − ₹800 crore = ₹80 crore. Hence, growth rate = (80 / 800) × 100 = 10%. Option B is correct. Eight percent understates the calculated change, while twelve and twenty percent do not follow the required base-year calculation.

Correct answer: A. It will approximately double

Explanation: Nominal GDP equals the value of current output calculated using current prices. If every relevant price doubles while the physical quantities of output remain unchanged, the value of that same output approximately doubles. Hence option A is correct. Real GDP would remain unchanged when base-year prices and quantities are unchanged; options B, C, and D confuse nominal valuation with real output.