Real GDP and Nominal GDP

Correct answer: A. To remove the effect of price changes and measure actual output

Explanation: GDP at constant prices, also called real GDP, values production using the prices of a selected base year. Holding prices constant removes the effects of inflation or deflation, so changes in the measure primarily reflect changes in quantities of output. It does not restrict the calculation to government spending, add foreign production, or measure import prices. Hence option A is correct.

Correct answer: A. ₹1800 and ₹2250

Explanation: Real contribution uses the base-year price, because real GDP isolates quantity changes from price changes. Thus real contribution = 30 units × ₹60 = ₹1,800. Nominal contribution uses the current price, so nominal contribution = 30 units × ₹75 = ₹2,250. The order asked is real first and nominal second, making option A correct; reversing the values gives option B.

Correct answer: A. When the rise is caused only by higher prices

Explanation: Nominal GDP is measured using current prices, so it can increase even when the quantity of production has not changed. If prices rise because of inflation while real output remains constant, nominal GDP shows an increase but real GDP does not. Therefore nominal growth alone may exaggerate economic performance. Option B represents genuine quantity growth, and option C confirms rather than misleads about real growth.

Correct answer: C. ₹1050 crore

Explanation: The GDP-deflator relationship is GDP deflator = (Nominal GDP ÷ Real GDP) × 100. Rearranging gives Nominal GDP = Real GDP × Deflator ÷ 100. Substituting the values: ₹840 crore × 125 ÷ 100 = ₹840 × 1.25 crore = ₹1,050 crore. Hence option C is correct. Multiplying by 125 without dividing by 100 would incorrectly treat the index as a multiplier of 125 rather than 1.25.

Correct answer: C. ₹1540 crore

Explanation: When the price level is constant, nominal GDP and real GDP change in the same proportion because no price effect is introduced. A 10% increase means multiplying the initial nominal GDP by 1.10: ₹1400 crore × 1.10 = ₹1540 crore. Hence option C is correct. The initial real GDP is useful context, but it is not necessary for the final calculation because the price level does not change.

Correct answer: A. Effect of price changes

Explanation: Real GDP values current production using fixed prices from a selected base year. Because the same prices are applied across years, changes caused solely by inflation or deflation are removed from the comparison. The remaining movement mainly reflects changes in quantities or output. Thus A is correct. Base-year pricing does not automatically control population, income distribution, or foreign-trade effects.

Correct answer: A. Both will be equal

Explanation: Real GDP is calculated using base-year prices, whereas nominal GDP is calculated using current-year prices. In the new base year, the current prices and base-year prices are identical. Therefore, the value of production calculated by both methods is the same in that year. The other options are incorrect because equality, not a permanent difference or zero value, is the relevant result.

Correct answer: A. The average price level rose by about 7 percent

Explanation: Nominal GDP equals the price level multiplied by the quantity of output, while real GDP isolates the quantity change by using constant prices. If real GDP growth is zero, output quantity is unchanged. A 7 percent rise in nominal GDP must therefore mainly reflect a rise in the average price level, approximately 7 percent under the usual simplified interpretation. Thus A is correct.

Correct answer: C. ₹1,600

Explanation: Real GDP values current quantities at base-year prices, so current prices are not needed. For the first good, the contribution is 30 × ₹20 = ₹600. For the second good, it is 25 × ₹40 = ₹1,000. Adding both constant-price contributions gives ₹600 + ₹1,000 = ₹1,600. Therefore option C is correct; using current prices would produce nominal GDP instead.

Correct answer: A. Nominal GDP will be lower than real GDP

Explanation: Nominal GDP values current output at current prices, whereas real GDP values the same output at base-year prices. If current prices are generally below base-year prices, the current-price valuation will generally be lower than the base-price valuation, assuming the same quantities and no unusual weighting issue. Thus nominal GDP is lower than real GDP. Equality occurs only when the relevant price levels coincide.

Correct answer: A. When the price level remains unchanged

Explanation: Nominal GDP changes because of both output quantities and prices, while real GDP changes only because of output quantities. If the price level remains unchanged, the price component contributes no additional growth. Consequently, any percentage change in nominal GDP comes from the same output change measured by real GDP, so their growth rates are equal. Population, imports, and government spending do not by themselves establish this equality.

Correct answer: A. 20 percent

Explanation: Real GDP measures current output using base-year prices, so the current price of ₹50 must not be used for real-GDP growth. Base-year real GDP is 50 × ₹40 = ₹2,000, and current-year real GDP at base-year prices is 60 × ₹40 = ₹2,400. Growth is (2,400 − 2,000) ÷ 2,000 × 100 = 20%. Thus option A is correct; using current prices would mix price and quantity changes.

Correct answer: B. 3 crore

Explanation: Per-capita real GDP equals total real GDP divided by population. Rearranging the relationship gives population = total real GDP ÷ real GDP per capita. Thus, population = ₹900 crore ÷ ₹300 per person = 3 crore persons. Therefore option B is correct. The units are consistent because ₹900 crore divided by ₹300 gives a population expressed in crore; the other options do not follow from the stated ratio.

Correct answer: B. 10 percent

Explanation: The GDP deflator satisfies real GDP = nominal GDP × 100 ÷ deflator. Since the deflator is 125 in both years, the same price adjustment applies to both observations. First-year real GDP is 1,100 × 100 ÷ 125 = ₹880 crore, and next-year real GDP is 1,210 × 100 ÷ 125 = ₹968 crore. Growth is 88 ÷ 880 × 100 = 10%, so option B is correct.

Correct answer: A. The first country

Explanation: The identity is nominal GDP = real GDP × GDP deflator ÷ 100. Because the two countries have equal real GDP, the country with the larger deflator has the higher price level applied to the same real output. The first country therefore has higher nominal GDP, making option A correct. Equal real GDP alone would imply equal nominal GDP only if the deflators were also equal; options B and C ignore this price difference.

Correct answer: A. ₹15,000

Explanation: Real GDP measures current production using base-year prices, thereby removing the effect of current price changes. The current quantity is 500 and the base-year price is ₹30, so real GDP = 500 × ₹30 = ₹15,000. The current price of ₹36 is not used in this calculation; using it would produce nominal GDP of ₹18,000, which is why option C is a tempting but incorrect distractor.

Correct answer: C. ₹18,000

Explanation: Nominal GDP values current production at current-year prices. Since the current price is ₹36 and the current quantity is 500, nominal GDP = ₹36 × 500 = ₹18,000. The base-year price, if known, would be relevant for real GDP but not for this calculation. Option A uses the earlier base price of ₹30, while B and D do not follow the stated multiplication.

Correct answer: C. It will remain unchanged

Explanation: The GDP deflator is calculated as (Nominal GDP ÷ Real GDP) × 100. If nominal GDP and real GDP both increase by exactly 9 percent, the new ratio is (1.09 × Nominal GDP) ÷ (1.09 × Real GDP), so the common factor 1.09 cancels. The deflator therefore remains unchanged. Option C is correct. Options A and D incorrectly add the growth rates, while B incorrectly assumes that equal growth lowers the ratio.

Correct answer: C. 120

Explanation: For index numbers, Real GDP index = (Nominal GDP index ÷ GDP deflator index) × 100. Substituting the given values gives (132 ÷ 110) × 100 = 1.2 × 100 = 120. Therefore option C is correct. Option B results from an incorrect division or rounding, and option D multiplies the two indices instead of removing the price effect. Option A simply repeats the deflator and does not represent the calculated real-output index.

Correct answer: C. 135

Explanation: The index relationship is Nominal GDP index = (Real GDP index × GDP deflator index) ÷ 100. Using the data, the nominal index is (108 × 125) ÷ 100 = 13,500 ÷ 100 = 135. Hence option C is correct. Option A gives only the price index, option B does not follow from the multiplication, and option D overstates the result. The division by 100 is necessary because both inputs are index numbers based on 100.

Correct answer: B. It changes with current domestic production

Explanation: The GDP deflator is an implicit price index for all final goods and services produced domestically. Its effective basket reflects the composition of current domestic output, so the relative weights can change as production changes. Therefore option B is correct. Unlike a fixed-base consumer price index, it is not permanently tied to one consumer basket. It is also not restricted to food or imported goods; imports are excluded from domestic GDP.

Correct answer: B. The GDP deflator

Explanation: The GDP deflator measures prices of domestically produced final output and can include investment goods such as machines. A consumer price index mainly tracks the prices of goods and services purchased by households, so a sharp change in machinery prices may have little direct effect on it. Therefore option B is the best answer. The population index is irrelevant, and saying neither is affected ignores the deflator’s coverage of domestic capital goods.

Correct answer: A. Because imports are not domestic final output

Explanation: The GDP deflator is based on prices of final goods and services produced within the domestic economy. Imported crude oil is produced abroad, so its import price is not directly part of the domestic output basket used for the deflator. Option A is correct. However, the increase can have an indirect effect if costlier oil raises the prices of domestically produced goods and services. The other options are factually incorrect.

Correct answer: C. Welfare may have risen or fallen

Explanation: Real GDP measures the inflation-adjusted value of recorded final production, but it does not fully subtract pollution, health damage, environmental degradation, or unequal distribution. Therefore higher real GDP indicates more measured output, not a definite welfare improvement. Welfare may rise if production benefits exceed environmental costs, or fall if the damage is larger. Hence C is correct.

Correct answer: C. It remained unchanged

Explanation: Real GDP per capita equals real GDP divided by population. In year one it is 1,000 ÷ 50 = 20 crore per lakh person, while in year two it is 1,100 ÷ 55 = 20. Both GDP and population increased by 10%, so their ratio did not change. Therefore C is correct; total real GDP growth alone does not imply per-capita growth.