Real GDP and Nominal GDP

Correct answer: B. No appropriate base-year price is available for it

Explanation: Constant-price GDP values current quantities using prices from the base year, thereby separating changes in output from changes in prices. A newly introduced product has no observed base-year price, so statisticians must estimate a comparable price or use an alternative method. Its current quantity can still be measured, and it does not stop being a final good.

Correct answer: B. Quality adjustment

Explanation: Real GDP aims to measure changes in the volume of output, not merely changes in posted prices. When a computer becomes twice as capable at the same price, treating it as unchanged would understate the effective increase in output and quality. A quality adjustment, often based on comparable characteristics, is therefore required; imports or currency units do not solve this issue.

Correct answer: A. Misweighting of goods' current economic importance

Explanation: Real GDP calculated with fixed base-year prices values current quantities using an old price structure. If relative prices change substantially, goods that are now more or less important may receive weights that no longer reflect their current economic significance. Thus option A is correct. The method does not make quantities zero, alter the money supply automatically, or convert imports into exports; chain-weighted measures can reduce this bias.

Correct answer: A. About a 1.5 percent increase

Explanation: Nominal GDP combines the movement of real output and the price level. Taking the initial GDP as 1, the new nominal value is 0.94 × 1.08 = 1.0152. Hence nominal GDP rises by 0.0152, or about 1.5 percent. Option A is correct. Simply adding the rates gives 2 percent, while subtracting them ignores the multiplicative relationship; 14 percent and 48 percent are clearly inconsistent.

Correct answer: A. Population grew faster than real GDP

Explanation: Real GDP per capita equals real GDP divided by population. If total real GDP rises but the quotient falls, population must have increased sufficiently faster than real GDP. For example, output growth of 3 percent alongside population growth of 5 percent lowers output per person. Therefore option A is necessary. The statement alone does not determine the price level, nominal GDP being zero, or the trade balance.

Correct answer: A. Output quantities rise and prices fall sufficiently

Explanation: Real GDP measures quantities at constant prices, so an increase in production quantities raises it. Nominal GDP measures current-price value, approximately quantity multiplied by price. If quantities rise while prices fall by enough to offset that increase, nominal GDP can remain unchanged even though real GDP increases. Thus option A is correct. Options B and D normally raise nominal GDP, while C lowers real GDP.

Correct answer: A. It does not clearly separate differences in output volume and purchasing power

Explanation: Nominal GDP is measured using current prices and a currency unit. Comparisons across countries can therefore reflect exchange-rate movements and differences in domestic price levels rather than differences in the physical volume of output. A conversion using purchasing-power parity, or a suitable real measure, can provide a better comparison. Option A is correct; nominal GDP neither measures agriculture alone nor equalises population automatically.

Correct answer: A. The good may receive excessive weight in real GDP

Explanation: Under the fixed-price method, current quantities are multiplied by base-year prices. An unusually high base-year price therefore assigns an unusually large weight to every current unit of that good. Its measured contribution to real GDP may consequently be overstated relative to goods whose prices were lower or more representative. Thus option A is correct. The method does not exclude the good, set its quantity to zero, or force nominal GDP to zero.

Correct answer: D. ₹3,000 crore

Explanation: The GDP deflator is 80 because current prices are 20 percent below the base-year level of 100. Real GDP = (Nominal GDP ÷ Deflator) × 100 = (₹2,400 ÷ 80) × 100 = ₹3,000 crore. Therefore, option D is correct. Options A and B incorrectly reduce nominal GDP, while option C applies an inappropriate price adjustment.

Correct answer: A. Failure to capture the substitution effect properly

Explanation: Fixed base-year weights keep the old consumption pattern even when consumers substitute toward a good that has become relatively cheaper. Consequently, a fixed-weight price index may overstate the cost of maintaining the old basket and fail to capture the substitution effect accurately. Thus, option A is correct; the other choices are unrelated to index-number weighting.

Correct answer: A. 5 percent

Explanation: Convert both nominal values into base-year prices. Year-one real GDP = (1,000 ÷ 100) × 100 = ₹1,000 crore. Year-two real GDP = (1,260 ÷ 120) × 100 = ₹1,050 crore. Real growth = [(1,050 − 1,000) ÷ 1,000] × 100 = 5 percent, so option A is correct. The 26 percent figure is nominal growth, not real growth.

Correct answer: B. It may grow slowly or even fall

Explanation: Real GDP measures quantities using base-year prices, so it can rise when total physical output increases. Nominal GDP, however, values output at current prices and is affected by the production mix. If the economy shifts toward goods with lower prices, the increase in quantities may be partly or fully offset in current-value terms. Therefore, option B is correct.

Correct answer: A. Real growth may be understated

Explanation: Real GDP attempts to measure changes in output after removing price changes. If a service becomes better but statistical methods record the change mainly as a higher price, the quality improvement is not fully counted as additional real output. Real growth can therefore be understated. It is not necessarily doubled, and this issue cannot make nominal GDP zero or fix the deflator at 100. Option A is correct.

Correct answer: C. ₹924 crore

Explanation: First calculate next-year real GDP: ₹800 × 1.05 = ₹840 crore. With the initial deflator at 100 and inflation of 10 percent, the next-year deflator is 110. Nominal GDP = Real GDP × Deflator ÷ 100 = ₹840 × 110 ÷ 100 = ₹924 crore. Therefore, option C is correct. Option A ignores inflation, while the other values use an incorrect adjustment.

Correct answer: B. Real output growth and overall price growth

Explanation: Nominal GDP is the value of currently produced final goods and services measured at current prices. Therefore, its growth reflects two main components: a change in the quantity of real output and a change in the general price level. Real GDP isolates the quantity effect, while the GDP deflator reflects the price effect. Thus, option B is correct; population, taxes, exports, or debt alone do not provide the complete decomposition.

Correct answer: B. About a 10 percent fall

Explanation: Nominal GDP equals the price level multiplied by real GDP. Taking year one as 1, the price-level index in year two is approximately 1.08 divided by 1.20, which equals 0.90. Hence the price level has changed by 0.90 minus 1, or about minus 10 percent. This is deflation because real output increased faster than nominal GDP. Therefore, option B is correct.

Correct answer: B. 20.96 percent

Explanation: Nominal GDP changes through the combined multiplication of quantity and price indices, not by simply adding their percentage changes. The new quantity index is 1.08 and the new price index is 1.12. Therefore, the nominal GDP index is 1.08 × 1.12 = 1.2096. The exact increase is (1.2096 − 1) × 100 = 20.96 percent. Option B is correct; 20 percent is only the simple-sum approximation.

Correct answer: A. 4.55 percent

Explanation: The relationship is nominal GDP growth factor = real GDP growth factor multiplied by the price-level growth factor. Thus, the real GDP factor is 1.15 ÷ 1.10 = 1.04545. The corresponding real growth rate is (1.04545 − 1) × 100, approximately 4.55 percent. Option A is correct. Five percent is a rounded subtraction of 15 minus 10, not the more accurate index-based calculation.

Correct answer: A. Output rises and prices fall sufficiently

Explanation: Real GDP values current production at base-year prices, whereas nominal GDP values it at current prices. Therefore, real GDP can rise when physical output increases, while nominal GDP remains unchanged if the price level falls by a sufficient amount. Options B and D would normally raise nominal GDP, while C would reduce real GDP rather than increase it.

Correct answer: B. 0.25 percent fall

Explanation: Nominal GDP is the product of real GDP and the GDP deflator, after expressing the deflator as a ratio. A 5% real increase gives a factor of 1.05, and a 5% deflator decrease gives a factor of 0.95. Their product is 1.05 × 0.95 = 0.9975, or 99.75% of the original value. Thus nominal GDP falls exactly by 0.25%.

Correct answer: A. Real GDP is higher in the second year

Explanation: From the deflator formula, Real GDP = (Nominal GDP × 100) ÷ GDP deflator. If nominal GDP is unchanged in both years, a lower deflator in the second year means the same numerator is divided by a smaller number. Consequently, real GDP is higher in the second year. Option C would require the deflator also to be unchanged, while B reverses the mathematical relationship.

Correct answer: C. Remains unchanged

Explanation: Real GDP per capita is calculated by dividing real GDP by population. Initially, it is 600 ÷ 120 = 5. After the changes, it is 660 ÷ 132 = 5. Since both real GDP and population increase by the same proportion, the quotient does not change. Therefore, option C is correct; options A and D incorrectly treat the GDP increase alone as the per-capita change, while B reverses the result.

Correct answer: A. 6.25 percent rise

Explanation: Nominal GDP equals the product of the quantity index and the price index. A 15% quantity fall leaves 0.85 of the original quantity, while a 25% price rise gives a 1.25 price index. Thus the new nominal GDP is 0.85 × 1.25 = 1.0625 times the old value, an exact increase of 6.25%. Therefore A is correct; simple subtraction gives the misleading 10% result.

Correct answer: A. Inflation and population growth exceed real output growth

Explanation: Nominal GDP can rise simply because prices increase, even when the increase in physical output is small. Real GDP per capita equals real GDP divided by population; it falls whenever population grows faster than real output. Therefore high inflation together with population growth exceeding real output growth can produce both stated outcomes, making A correct. C and D would normally raise per-capita real GDP.

Correct answer: A. It falls by 4 percent

Explanation: The formula is real GDP = (nominal GDP ÷ GDP deflator) × 100. Initially, real GDP = (500 ÷ 100) × 100 = 500. In the later period, it equals (600 ÷ 125) × 100 = 480. The change is 480 − 500 = −20, and −20/500 × 100 = −4%. Hence real GDP falls by 4 percent; nominal growth alone does not imply real growth.