Real GDP and Nominal GDP

Correct answer: B. To better reflect the current structure of the economy

Explanation: The composition of an economy changes over time: new products appear, consumers alter their spending, and the relative importance of sectors shifts. Revising the base year updates the price and production weights so that real GDP and related indices represent the current structure more accurately. It does not abolish nominal GDP or merely change tax rates.

Correct answer: A. A sufficiently large fall in prices

Explanation: Nominal GDP reflects both quantities and current prices, whereas real GDP isolates quantities by using constant prices. If output increases, real GDP can rise; however, a sufficiently large fall in the prices of that output can reduce the total value measured at current prices. Thus nominal GDP may fall at the same time, making option A possible.

Correct answer: A. Sharp price rise with a fall in output

Explanation: Nominal GDP equals the value of current production at current prices, while real GDP tracks production using base-year prices. A fall in output lowers real GDP, but a sufficiently sharp increase in prices can raise the current-price value enough to increase nominal GDP. Therefore option A describes a possible combination of changes.

Correct answer: A. Because it includes changes in prices

Explanation: Nominal GDP values final goods and services at the prices prevailing in each respective year. Consequently, its change combines a quantity effect, caused by altered production, with a price effect, caused by inflation or deflation. A rise in nominal GDP therefore does not necessarily mean that real output increased; real GDP is needed for a cleaner growth comparison.

Correct answer: B. Current quantities produced

Explanation: Real GDP is calculated by valuing the quantities produced in the current year at prices from the chosen base year: Real GDP = Σ(current-year quantities × base-year prices). Thus current quantities are essential, while current prices are deliberately excluded to remove the price effect. Option B is correct; base-year quantities and tax rates are not the required information here.

Correct answer: B. Current-year price and current-year quantity

Explanation: Nominal GDP measures the value of current production at the prices prevailing in the same year. Therefore, the calculation multiplies the current-year price of each final good by its current-year quantity and then adds the values of all final goods. Option B is correct. Option C uses a base-year price and is associated with real GDP, while option A is not a current-year valuation.

Correct answer: B. Base-year price and current-year quantity

Explanation: Real GDP values the current period’s output using prices from a selected base year. Thus, the current-year quantity of each final good is multiplied by its base-year price, and these values are added. Option B is correct. This method holds prices constant and therefore removes the effect of inflation or deflation. Option A calculates nominal GDP, whereas options C and D do not represent the standard real-GDP comparison.

Correct answer: A. ₹4,000

Explanation: Real GDP is calculated by valuing current output at the base-year price. Here, current quantity is 500 and the base price is ₹8, so real GDP = ₹8 × 500 = ₹4,000. Therefore, option A is correct. ₹5,000 would be nominal GDP because it uses the current price of ₹10. The other amounts do not follow either relevant price-quantity calculation.

Correct answer: B. ₹5,000

Explanation: Nominal GDP measures current production at current prices. The economy produces 500 units and the current price is ₹10, so nominal GDP = ₹10 × 500 = ₹5,000. Hence, option B is correct. The amount ₹4,000 uses the base price of ₹8 and therefore represents real GDP. Options C and D are not obtained from the stated nominal-GDP formula.

Correct answer: B. 10 percent

Explanation: The real GDP increase is ₹880 crore − ₹800 crore = ₹80 crore. Growth rate is calculated relative to the initial value: (increase ÷ initial GDP) × 100 = (₹80 ÷ ₹800) × 100 = 10%. Therefore, option B is correct. The figure ₹80 crore is the absolute increase, not 80%; 8% and 12% do not result from the stated calculation.

Correct answer: C. 15 percent

Explanation: First find the increase in nominal GDP: ₹1,150 crore − ₹1,000 crore = ₹150 crore. Nominal growth rate = (increase ÷ initial nominal GDP) × 100 = (₹150 ÷ ₹1,000) × 100 = 15%. Thus, option C is correct. The other percentages either use an incorrect denominator or do not represent the stated change from the initial value.

Correct answer: A. An increase in the price level

Explanation: Nominal GDP growth reflects changes in both physical output and prices, whereas real GDP growth is calculated at constant base-year prices. If nominal growth exceeds real growth, the difference generally reflects a rise in the overall price level, or inflation. Therefore, option A is correct. A price fall would normally reduce nominal growth relative to real growth; the other options do not follow from the comparison.

Correct answer: A. A fall in prices

Explanation: Real growth isolates changes in output by using constant prices, while nominal growth includes both output and price changes. If the general price level falls, the price effect can pull nominal growth below real growth. Hence, option A is possible and correct. A sharp price rise would generally make nominal growth higher, and unchanged output alone does not establish the stated relationship.

Correct answer: B. Real output has definitely increased

Explanation: Nominal GDP measures production using current prices, so it can increase because prices rise, quantities rise, or both rise. Therefore, a rise in nominal GDP alone cannot establish with certainty that real output increased; option B is correct. The monetary value has risen by definition, and higher prices or output are possible explanations. Real GDP is needed to confirm a change in actual production.

Correct answer: C. ₹1,500

Explanation: Real GDP is calculated by valuing current quantities at base-year prices, thereby holding prices constant. For the first good, the value is 100 × ₹5 = ₹500. For the second, it is 50 × ₹20 = ₹1,000. Adding these gives real GDP = ₹500 + ₹1,000 = ₹1,500 crore or units as specified. Thus option C is correct; using current prices would calculate nominal GDP instead.

Correct answer: C. ₹1,800

Explanation: Nominal GDP values goods and services at their current-period prices. The first good contributes 80 × ₹10 = ₹800, and the second contributes 40 × ₹25 = ₹1,000. Therefore, nominal GDP = ₹800 + ₹1,000 = ₹1,800. Option C is correct. Real GDP would require base-year prices, so options based on another price basis would not answer this question.

Correct answer: B. ₹2,000 crore

Explanation: The relationship is Real GDP = (Nominal GDP × 100) ÷ GDP deflator. Substituting the values gives Real GDP = (₹2,200 × 100) ÷ 110 = ₹2,000 crore. Hence option B is correct. Option C incorrectly treats nominal and real GDP as equal, option A uses an incorrect adjustment, and option D multiplies by the deflator rather than removing its price effect.

Correct answer: B. It will definitely rise

Explanation: The governing relationship is Nominal GDP = Real GDP × GDP deflator divided by 100. A 5 percent rise in real GDP increases the quantity component, while a rise in the deflator increases the price component. Since both components rise and are positive, nominal GDP must rise as well. Therefore, option B is correct; it cannot fall, remain unchanged, or become zero under these conditions.

Correct answer: B. ₹4,500 and ₹3,500

Explanation: Nominal output uses current-year prices, whereas real output uses base-year prices for the same current quantity. Therefore, nominal value = 250 × ₹18 = ₹4,500, and real value = 250 × ₹14 = ₹3,500. The requested order is nominal followed by real, so option B is correct. Option A reverses the two values, while C and D contain incorrect calculations.

Correct answer: C. ₹2,900 crore

Explanation: A price level 16 percent above the base year means the GDP deflator is 116, with the base year represented by 100. Nominal GDP = Real GDP × (Deflator ÷ 100) = ₹2,500 crore × 116/100 = ₹2,900 crore. Therefore, option C is correct. The other choices do not apply the 16 percent price increase correctly to the real GDP.

Correct answer: B. Prices and quantity of output

Explanation: Nominal GDP is calculated using the prices and quantities of goods and services produced in the current period. Consequently, it can rise because prices rise, because physical output rises, or because both change. Option B correctly identifies both determinants. Population, taxes, imports and exports, saving, and investment may influence economic activity, but none of the other options gives the complete direct pair used in nominal GDP valuation.

Correct answer: C. Nominal GDP will rise and real GDP will remain unchanged

Explanation: The governing distinction is that nominal GDP values current output at current prices, whereas real GDP values output using base-year prices. If only the price level increases and the physical quantity of output does not change, current-price valuation rises, so nominal GDP increases. Real GDP remains unchanged because its base-year prices and output quantity are unchanged. Therefore, option C is correct; option A wrongly treats a price rise as greater production, while B and D reverse the effect.

Correct answer: A. Both nominal and real GDP will rise

Explanation: Nominal GDP equals current prices multiplied by current output, while real GDP measures current output at base-year prices. When prices remain unchanged and the quantity produced increases, both valuation methods apply a higher quantity to the same price level. Consequently, nominal GDP and real GDP both rise. Option A is correct. Option B ignores the quantity effect on real GDP, option C ignores nominal valuation, and option D incorrectly assumes that unchanged prices prevent output-based growth.

Correct answer: B. Current prices are below base prices

Explanation: The governing concept is the difference between nominal and real GDP. Nominal GDP values current output at current prices, whereas real GDP values it at base-year prices. If nominal GDP is lower than real GDP, the current price level is generally below the base-year level, so the GDP deflator is below 100. Option A implies the opposite, while C and D do not follow from the comparison.

Correct answer: A. It separates price changes

Explanation: Real GDP uses constant base-year prices, so changes in its value mainly reflect changes in the quantity of goods and services produced. Nominal GDP uses current prices and can rise simply because of inflation, even when output is unchanged. Therefore real GDP gives a cleaner measure of actual economic growth. Options B and C measure different variables, and D is false because real GDP measures output.