Real GDP and Nominal GDP

Correct answer: B. Nominal GDP

Explanation: Under the expenditure method, nominal GDP is calculated using current prices, whereas real GDP values output at base-year or constant prices. If final-good quantities remain unchanged but their current prices rise, expenditure measured at current prices increases, so nominal GDP rises. The constant-price valuation does not change merely because current prices increased; therefore real GDP remains unchanged. Option A reverses the distinction, C incorrectly raises both, and D ignores price valuation. Thus B is correct.

Correct answer: A. Average price level rose by about 18 percent

Explanation: Nominal GDP equals the value of current output at current prices, whereas real GDP values output at constant base-year prices. If real GDP, representing the quantity of production, stays unchanged while nominal GDP increases by 18%, the change must generally come from higher prices. Thus the average price level rose by about 18%. Options B, C and D do not follow from the stated GDP relationship.

Correct answer: C. ₹1260 crore

Explanation: The GDP deflator is calculated as (Nominal GDP / Real GDP) × 100. Rearranging gives Nominal GDP = Real GDP × Deflator / 100. Substituting the data gives ₹900 crore × 140 / 100 = ₹1,260 crore. Therefore option C is correct. The other values result from using an incorrect multiplier or from failing to divide the index by 100.

Correct answer: A. ₹2400 and ₹3000

Explanation: Real contribution uses the current quantity valued at base-year prices: 150 × ₹16 = ₹2,400. Nominal contribution uses the same current quantity valued at the current price: 150 × ₹20 = ₹3,000. Therefore option A is correct. Reversing the two figures confuses the price bases, while equal figures ignore the difference between ₹16 and ₹20.

Correct answer: A. 20 percent

Explanation: The percentage increase must be measured relative to the original deflator value, 125. The index-point increase is 150 − 125 = 25. Hence the percentage increase is (25 / 125) × 100 = 20%. Option B incorrectly treats the point increase as a percentage, and the other options use unsuitable bases or arithmetic.

Correct answer: A. The average price level is higher in the second year

Explanation: Real GDP values production at constant base-year prices, whereas nominal GDP values current production at current prices. If real GDP is unchanged, the quantity of output has not changed in the comparison. A higher nominal GDP must therefore result from a higher average price level, which also raises the GDP deflator. Hence option A is correct; B contradicts the unchanged real output, while C and D do not follow.

Correct answer: A. The deflator's basket can change with current production

Explanation: The GDP deflator is nominal GDP divided by real GDP, multiplied by 100. It covers domestically produced final goods and services, with weights that reflect the current composition of domestic output; therefore its basket can change. CPI instead follows a selected consumer basket and may include imported consumer goods. Hence A is correct, while B, C and D are overstatements.

Correct answer: B. Remains unchanged

Explanation: Real GDP per capita is calculated as real GDP divided by population. Initially it is 720 ÷ 80 = 9 units per person. In the later year it is 792 ÷ 88 = 9 units per person. Although total real GDP rises by 10 percent, population also rises by 10 percent, so the per-capita measure is unchanged. Therefore B is correct; total GDP growth alone does not imply higher output per person.

Correct answer: A. It does not fully measure leisure and environmental quality

Explanation: Real GDP removes the effect of price changes and measures the volume of market production, but economic welfare is broader than measured output. It may not capture leisure, unpaid household work, income distribution, product quality, or environmental damage. Therefore A is the best statement. B is false because real GDP does measure output quantity, C is false because it uses constant prices, and D reverses the domestic-production definition.

Correct answer: A. Price weights may be unsuitable for the current production structure

Explanation: Real GDP uses base-year prices to isolate changes in quantities. If the base year is very old, consumer preferences, technology, product varieties and the composition of production may have changed substantially. The old price weights can then give a distorted picture of current output. Thus A is correct. An old base year does not make current prices zero, prevent nominal GDP measurement, or fix population.

Correct answer: B. The second country

Explanation: The relationship is Real GDP = (Nominal GDP ÷ GDP deflator) × 100. Since both countries have the same nominal GDP, the country with the smaller deflator will have the larger quotient and therefore the larger real GDP. The second country has the lower deflator, so its real GDP is higher. Equal nominal GDP does not imply equal real GDP when price levels differ; hence option B is correct.

Correct answer: B. 25 percent

Explanation: Real GDP values both periods at base-year prices, so the relevant price is ₹30 in each calculation. Base-year real GDP is 80 × ₹30 = ₹2,400, and current-year real GDP is 100 × ₹30 = ₹3,000. Growth is [(3,000 − 2,400) ÷ 2,400] × 100 = 25 percent. The current price of ₹36 is excluded because real GDP removes price changes. Therefore, option B is correct.

Correct answer: A. When population grows faster than real output

Explanation: Real GDP per capita is calculated as total real GDP divided by population. It can decline even when total real GDP rises if population increases by a larger percentage than real GDP. For example, a 3 percent rise in real GDP combined with a 5 percent population increase lowers output per person. Falling prices or constant prices do not determine this ratio, so option A is correct.

Correct answer: C. ₹2,200

Explanation: Nominal GDP is the value of current production measured at current prices. For the first good, value is 20 × ₹50 = ₹1,000; for the second, it is 30 × ₹40 = ₹1,200. Adding them gives ₹2,200, so option C is correct. The other choices result from arithmetic or multiplication errors.

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

Explanation: Real GDP values goods and services at constant base-year prices, so changes in its value mainly reflect changes in quantities or actual output. Nominal GDP uses current prices and can rise merely because of inflation. Therefore option A is correct. Population, service coverage, and treatment of imports are not the defining reason.

Correct answer: A. Real GDP remains unchanged and nominal GDP rises by 30 percent

Explanation: Real GDP is calculated using constant prices, so unchanged quantities mean that real GDP does not change. Nominal GDP uses current prices; with quantities fixed and prices 30 percent higher, the value of production rises by 30 percent. Hence option A is correct. The other options confuse price effects with quantity effects.

Correct answer: A. Real GDP and GDP deflator

Explanation: Real GDP values current production at base-year prices, so it isolates changes in the quantity of output from price changes. The GDP deflator compares nominal GDP with real GDP and measures the price level of domestically produced final goods and services. Thus option A supplies the two appropriate indicators; the other pairs do not separately measure both output and domestic prices.

Correct answer: B. ₹1,500 crore

Explanation: The GDP-deflator formula is Deflator = (Nominal GDP ÷ Real GDP) × 100. Rearranging gives Real GDP = Nominal GDP ÷ Deflator × 100. Substitution yields ₹1,725 ÷ 115 × 100 = ₹1,500 crore. Option A results from an incorrect division, while C and D fail to apply the index adjustment correctly.

Correct answer: C. 120

Explanation: The GDP deflator measures the price level relative to the base year and is calculated as (Nominal GDP ÷ Real GDP) × 100. Therefore, deflator = (₹2,700 ÷ ₹2,250) × 100 = 1.2 × 100 = 120. This means the current price level is 20% above the base-year level. The other values do not follow from the stated ratio.

Correct answer: C. ₹14,400

Explanation: Real GDP is calculated by valuing the current quantity at base-year prices, so that price changes are excluded. Here, real GDP = base-year price × current quantity = ₹45 × 320 = ₹14,400. The current price is not needed for this calculation. The other options arise from multiplying incorrectly or using a price different from the stated base-year price.

Correct answer: C. ₹17,280

Explanation: Nominal GDP values current production at current market prices. Therefore, nominal GDP = current price × current quantity = ₹54 × 320 = ₹17,280. The earlier base-year price of ₹45 is relevant for real GDP, not nominal GDP. Option A is the real-GDP value from the previous calculation, while the other figures use incorrect arithmetic.

Correct answer: C. It will remain unchanged

Explanation: Nominal GDP is calculated using current prices and current quantities: Σ(P × Q). If every price is multiplied by 2 and every quantity by 0.5, each product value is multiplied by 2 × 0.5 = 1. Therefore every component, and hence total nominal GDP, remains unchanged. Option C is correct. A considers only the quantity effect, B only the price effect, and D incorrectly multiplies the two changes as if both were increases.

Correct answer: B. ₹1,920

Explanation: Nominal GDP values current quantities at current-year prices. Using the given quantities of 80 and 24, the first good contributes ₹15 × 80 = ₹1,200 and the second contributes ₹30 × 24 = ₹720. Therefore nominal GDP = ₹1,200 + ₹720 = ₹1,920, so option B is correct. Using base prices would calculate real GDP instead, while the other options contain arithmetic errors.

Correct answer: B. Quantity effect and price effect

Explanation: Nominal GDP is the market value of final output at current prices, so it can change because the amount of output changes, because prices change, or because both change together. Economic analysis separates the quantity effect from the price effect by using real GDP, which values output at constant or base-year prices. Thus option B is correct; the other pairs are not the fundamental decomposition of nominal GDP.

Correct answer: A. Production may be understated

Explanation: GDP attempts to measure the value of final production within the economy, but official estimates depend on reporting and statistical coverage. If illegal market activities produce goods or services but are not recorded because reliable estimates are unavailable, measured output can be lower than actual output. Therefore GDP may be understated, making A correct. The effect is not necessarily an overstatement, and missing illegal production does not force the deflator to zero or make nominal and real GDP equal.