Real GDP and Nominal GDP

Correct answer: B. Because current prices of the base year are the constant prices

Explanation: The governing concept is the choice of base-year prices. Real GDP values the base year's output at base-year prices, while nominal GDP values it at current prices. In the base year, current prices and the selected constant prices are identical. Thus both calculations use the same prices and produce the same GDP value, making option B correct. Output, population, and the range of goods do not explain the equality.

Correct answer: C. ₹2000

Explanation: Real GDP is calculated by multiplying current-year quantities by base-year prices, so that price changes are excluded. Wheat contributes 50 × ₹20 = ₹1,000, and cloth contributes 10 × ₹100 = ₹1,000. Total real GDP = ₹1,000 + ₹1,000 = ₹2,000. Hence option C is correct. Using current prices or adding quantities without valuing them would produce an incorrect result.

Correct answer: B. It does not separate the effects of price and quantity changes.

Explanation: Nominal GDP values current production at current prices, so its change combines two effects: changes in the quantity of output and changes in prices. For example, GDP can rise even when production is unchanged if prices increase. Real GDP removes the price effect by using base-year prices. Therefore, option B is correct; option D describes real GDP, while government production is included in GDP.

Correct answer: A. The price level also increased.

Explanation: Nominal GDP reflects both current output and current prices, whereas real GDP isolates the change in output using constant prices. Since nominal GDP grew by 20% while real GDP grew by only 8%, the additional increase is attributable mainly to a rise in the price level. The exact price increase is not simply 12% because growth rates combine multiplicatively, but a price rise is clearly indicated. Thus A is correct.

Correct answer: A. The average price level doubled.

Explanation: The GDP deflator relationship is Nominal GDP = Real GDP × price index (after consistent scaling). If real GDP remains unchanged but nominal GDP becomes twice as large, the price index must also become twice as large, assuming no measurement change or other complication. Thus the average price level doubled. Output did not double because real GDP, the quantity-based measure, stayed constant. Hence A is correct.

Correct answer: A. Current prices are, on average, below base-year prices.

Explanation: The GDP deflator equals (Nominal GDP ÷ Real GDP) × 100. When nominal GDP is lower than real GDP for the same output basket, this ratio is below 1, or the index is below 100. Therefore the current average price level is lower than the base-year price level. This does not imply zero output or determine the trade balance. Hence option A is correct.

Correct answer: B. They may be revised because of new constant prices and weights

Explanation: Changing the base year changes the prices used to value quantities and may also update the relative weights of goods and services. Therefore, historical real GDP estimates can be recalculated or revised. Option B is correct because the series is expressed using the new valuation framework; it does not become zero or nominal GDP, while option D incorrectly assumes that statistical methods never change.

Correct answer: C. The deflator covers domestic final output while CPI focuses on a consumer basket

Explanation: The GDP deflator measures the price change of final goods and services produced within the domestic economy, with coverage that changes as the composition of domestic output changes. CPI measures the cost of a selected basket purchased by consumers, including relevant imports. Therefore option C is correct; the other choices reverse the coverage or wrongly claim that the indices are always identical.

Correct answer: A. ₹800 and ₹1200

Explanation: Real GDP values current-year quantities at base-year prices, so it is 80 × ₹10 = ₹800. Nominal GDP values current-year quantities at current-year prices, so it is 80 × ₹15 = ₹1,200. Therefore option A is correct. The base-year production value of ₹1,000 is not current real GDP, and reversing the two values confuses the definitions.

Correct answer: A. Population rose approximately at the same rate as real GDP

Explanation: Real GDP per capita is calculated as real GDP divided by population. If total real GDP increases but this ratio remains unchanged, population must have increased in approximately the same proportion. The conclusion does not imply that prices became zero, nominal GDP fell, or physical output stayed unchanged; in fact, total real output clearly increased.

Correct answer: A. New goods and changing consumption patterns may not be represented properly

Explanation: Real GDP uses base-year prices to isolate changes in quantities. When the base year becomes very old, its price weights may no longer reflect current consumption, production technology, or newly introduced goods. The resulting real GDP can therefore misrepresent the present structure of the economy. Nominal GDP does not become zero, imports do not become domestic output, and price changes are not literally eliminated.

Correct answer: B. Nominal GDP changes but real GDP remains constant

Explanation: Real GDP values current quantities using fixed base-year prices. If quantities do not change, this calculation remains unchanged even when current prices move. Nominal GDP, however, values the same output at current prices, so it changes with the price movement. The two measures therefore need not change at the same rate, and neither becomes zero merely because prices change.

Correct answer: B. 25 percent

Explanation: Real GDP values output using base-year prices, so the current quantity of 50 must be valued at ₹25, not ₹30. Base-year real GDP is 40 × ₹25 = ₹1,000, while current real GDP is 50 × ₹25 = ₹1,250. Therefore, growth is (1,250 − 1,000) ÷ 1,000 × 100 = 25%. The price rise affects nominal GDP, not this real-growth calculation; hence option B is correct.

Correct answer: A. Nominal GDP gives weight through current prices

Explanation: Nominal GDP is the sum of each good’s current quantity multiplied by its current price. Since the quantities are equal, the good whose current price has risen most contributes the largest current-value amount to nominal GDP. Real GDP would instead use base-year prices, so its comparison would not be driven by the current price increase in the same way. Therefore, option A correctly states the governing principle.

Correct answer: B. The second economy

Explanation: Real GDP values current production using constant or base-year prices, whereas nominal GDP uses current prices. If nominal GDP is equal in both economies, the economy with the higher price level must have its output value inflated more by prices. Therefore, after removing the price effect, the second economy, with the lower price level, will generally have higher real GDP. Option C ignores inflation adjustment, and option D incorrectly treats real GDP as unrelated to the price index.

Correct answer: C. Real GDP at constant prices

Explanation: Real GDP at constant prices holds the price structure fixed and measures changes in the quantity of goods and services produced. It therefore helps a policymaker identify genuine long-term output growth without confusing it with inflation. GDP at current prices and nominal per capita income combine quantity and price changes, while the GDP deflator measures the price component rather than production itself. Thus option C is the appropriate measure.

Correct answer: B. ₹400

Explanation: Real GDP values current-year quantities at base-year prices, thereby excluding the effect of current price changes. For the first good, the value is ₹4 × 50 = ₹200. For the second good, it is ₹10 × 20 = ₹200. Adding both values gives real GDP = ₹200 + ₹200 = ₹400. Current-year prices are not needed for this calculation, so option B is correct.

Correct answer: C. It is generally unaffected

Explanation: Nominal GDP is calculated using the prices and quantities prevailing in the same year being measured. It therefore does not depend on which year is selected as the base year. Changing the base year changes the price weights used for real GDP and may alter the presentation of constant-price series, but it does not mechanically change nominal GDP. Hence option C is correct; the other options claim effects that are not required.

Correct answer: B. When the price level rises

Explanation: Nominal GDP changes because of both changes in quantities produced and changes in prices. When the price level rises, inflation adds a price component to nominal GDP growth, so the nominal rate is generally greater than the growth of real output. Therefore option B is correct. Falling prices tend to make nominal growth lower than real growth, and the base-year choice or import movement alone does not establish the stated relationship.

Correct answer: B. Changes in the physical volume of output

Explanation: Real GDP is valued at constant or comparable prices so that changes caused by inflation or price movements are removed as far as possible. What remains is the change in the volume or physical quantity of goods and services produced. Tax rates, exchange rates, and public debt may influence the economy, but they are not the specific change isolated by a quantity measure of GDP.

Correct answer: A. Because imports are not domestic production

Explanation: GDP measures the market value of final goods and services produced within a country’s domestic boundaries. An imported final consumer good may be purchased by domestic households, but its production occurred abroad, so it is not domestic output. In expenditure accounting, imports are subtracted from consumption or other expenditure components to prevent foreign production from being counted in GDP. Therefore option A is correct.

Correct answer: B. 10 percent

Explanation: Because both figures are valued at the same base-year prices, their difference represents a change in real output rather than a price effect. The growth rate is [(₹550 − ₹500) ÷ ₹500] × 100 = (₹50 ÷ ₹500) × 100 = 10 percent. Therefore option B is correct. The 5 percent choice halves the change, while 50 and 110 percent confuse the level difference with the percentage growth rate.

Correct answer: A. Nominal GDP rose while real GDP remained unchanged

Explanation: Nominal GDP changes because of both quantities and prices, whereas real GDP removes the effect of price changes. If nominal GDP rises but real GDP stays unchanged, the economy has not produced more measured output; the increase is attributable to higher prices. Therefore, option A identifies inflation-driven growth. The other choices describe output decline or genuine real improvement.

Correct answer: B. The second economy

Explanation: The GDP deflator is calculated as nominal GDP divided by real GDP, multiplied by 100. Rearranging gives real GDP = nominal GDP × 100 divided by the deflator. Since nominal GDP is equal in both economies, the economy with the lower deflator has the higher real GDP. The second economy has a deflator of 100 rather than 125, so its real GDP is higher. Option B is correct.

Correct answer: B. ₹800 crore

Explanation: The GDP deflator formula is deflator = nominal GDP divided by real GDP, multiplied by 100. Rearranging, real GDP = nominal GDP × 100 divided by the deflator. Thus, real GDP = 960 × 100 ÷ 120 = 800 crore rupees. The deflator is based on 100 in the base year, so failing to apply the factor of 100 would produce an incorrect result. Option B is correct.