Real GDP and Nominal GDP

Correct answer: B. When the deflator is 100

Explanation: The GDP deflator equals nominal GDP divided by real GDP, multiplied by 100. If the deflator is 100, nominal GDP and real GDP have the same numerical value because the current price level equals the base-year price level. A deflator of 50 implies a different price level, while population and trade balance do not determine whether nominal and real GDP are equal. Hence option B is correct.

Correct answer: A. It will fall by 4 percent

Explanation: Nominal GDP values current quantities at current prices, so both percentage changes must be applied multiplicatively. The quantity factor is 1.20 and the price factor is 0.80. Their product is 1.20 × 0.80 = 0.96, meaning nominal GDP becomes 96 percent of its original value and therefore falls by 4 percent. The effects do not cancel because percentage changes are based on different intermediate values, so option A is correct.

Correct answer: A. 5 percent rise

Explanation: Nominal GDP changes with the product of the quantity and price factors. A 25 percent fall in quantity gives a factor of 0.75, while a 40 percent price rise gives a factor of 1.40. Thus, 0.75 × 1.40 = 1.05, so nominal GDP becomes 105 percent of its original level and rises by 5 percent. Adding or subtracting the two percentages would be incorrect; option A is correct.

Correct answer: B. ₹1,720

Explanation: Nominal GDP is the market value of current production calculated at current prices. The first good contributes ₹10 × 100 = ₹1,000, and the second contributes ₹18 × 40 = ₹720. Their sum is ₹1,000 + ₹720 = ₹1,720. Unlike real GDP, this measure does not replace current prices with base-year prices. Therefore option B is correct.

Correct answer: B. Because the price weights assigned to goods and services change

Explanation: Real GDP is constructed by valuing quantities with prices from a selected base year. When the base year is revised, the relative price weights used to aggregate different goods and services also change. Goods whose prices or economic importance have changed may then receive different weights, altering their contributions to measured real growth. The physical output data are not erased and nominal GDP does not become zero, so option B is correct.

Correct answer: A. It may underweight its current output

Explanation: A fixed-base real GDP method values current quantities using prices from one unchanged base year. If the good had a very low price in that base year, its quantity receives a relatively small value weight even after the good becomes economically important. Consequently, the method may understate the good's contribution to current real output or growth. It does not double-count production or redefine imports, so option A is correct.

Correct answer: A. Labour productivity rises sufficiently

Explanation: Real GDP measures the inflation-adjusted value of final goods and services, whereas employment measures the number of people or jobs engaged in production. If labour productivity rises sufficiently, firms can produce more output with fewer workers, perhaps because of technology, capital deepening, or improved organisation. Thus real GDP can increase while employment declines. Stable prices, zero imports, or a smaller population do not provide this necessary explanation, so option A is correct.

Correct answer: A. The chain weights of different components change over time

Explanation: Chain-weighted real GDP uses changing relative weights and links growth rates across periods rather than valuing every component permanently with one fixed set of prices. Because the component indexes are constructed with different period-specific weights, their sum need not equal the separately calculated aggregate exactly. This property is called non-additivity. Hence A is correct; the other options misstate the method.

Correct answer: A. Estimating a comparable base-year price for it

Explanation: Real GDP values current quantities at base-year prices so that price changes do not appear as changes in output. A newly introduced device has no directly observed base-year price, so statisticians must estimate a comparable price, use a matched model, or apply a quality adjustment. Treating its quantity as zero would omit genuine production, while classifying it as an import or intermediate good does not solve the pricing problem. Therefore option A is correct.

Correct answer: A. Inflation may be overstated and real growth understated

Explanation: A price index should distinguish a pure price increase from an improvement in the product received by consumers. Here, a 10 percent price rise accompanies a 25 percent quality improvement. If the entire price rise is treated as inflation, the statistical system may fail to credit the extra quality as real output. Consequently inflation can be overstated and real GDP growth understated. Options C and D are clearly unrelated, while B gives the opposite bias. Hence A is correct.

Correct answer: A. On the measured quantity of service output

Explanation: Nominal GDP equals the value of current output at current prices, while real GDP attempts to measure output using constant prices. If a regulated service price does not change, a productivity improvement will be visible in GDP only if the statistical agency can measure more units of service or a meaningful improvement in service quality. Relying only on inflation would miss the change. Population and imports are not sufficient determinants. Thus A is correct.

Correct answer: A. Appreciation of the domestic currency against the dollar

Explanation: GDP measured in domestic currency can remain exactly unchanged even when its dollar conversion rises. The conversion depends on the exchange rate: if the domestic currency appreciates against the dollar, each unit of domestic currency buys more dollars. The unchanged domestic-currency GDP therefore translates into a higher dollar value without requiring output to double. A zero price level or zero population would not explain a higher dollar valuation. Therefore option A is correct.

Correct answer: A. It adjusts for differences in domestic price levels

Explanation: Market exchange rates are influenced by financial flows, interest rates, expectations and other factors, so they may not show what goods and services cost within each country. Purchasing power parity uses a common basket or comparable purchasing power to adjust for differences in domestic price levels. This makes cross-country comparisons of real output and living standards more meaningful. It does not equalize populations, remove inflation, or measure only exports. Hence A is correct.

Correct answer: A. First 10 percent and then 10 percent

Explanation: Annual growth is measured against the GDP of the immediately preceding year. From year one to year two, growth = ((1,100 − 1,000) / 1,000) × 100 = 10%. From year two to year three, growth = ((1,210 − 1,100) / 1,100) × 100 = 10%. Therefore option A is correct. The 21% figure is the cumulative two-year increase, not the annual rate.

Correct answer: B. 21 percent

Explanation: Successive growth rates are compounded because the second 10% increase applies to the GDP after the first increase. Starting with 1, the level becomes 1 × 1.10 × 1.10 = 1.21 after two years. Hence total growth is (1.21 − 1) × 100 = 21%. Option B is correct. Simply adding 10% + 10% gives 20%, which ignores the larger second-year base.

Correct answer: B. About 18.9 percent

Explanation: Real GDP changes according to the nominal GDP factor divided by the price-level, or deflator, factor. Each year its factor is 1.20 / 1.10. Over two years the factor is (1.20 / 1.10)², so total real growth = [(1.20 / 1.10)² − 1] × 100 ≈ 18.9%. Therefore option B is correct. Option A is only the one-year real growth, while 44% incorrectly adds nominal increases.

Correct answer: A. Real output may rise while nominal output rises less or falls

Explanation: Government services without market prices are commonly valued using their production cost for nominal GDP. If the quantity of service increases, a constant-price measure can show higher real output. However, if cost per unit falls sufficiently, total current expenditure—and therefore nominal measured output—may grow only slightly or even decline. Hence A captures the possible divergence. The other choices claim outcomes that are not required by the information given.

Correct answer: A. Inventory quantity fell, but prices rose enough to increase current value

Explanation: Current-price inventory investment reflects both changes in physical quantity and changes in prices. Constant-price investment removes the price effect and therefore indicates that the quantity contribution was negative. For the current-price value nevertheless to be positive, the increase in prices must have been sufficiently large to outweigh the fall in quantity. Thus A is the only coherent explanation; B and D cannot create the stated divergence, and C is irrelevant.

Correct answer: A. Part of the price rise may reflect the real value of better quality

Explanation: A price increase can contain two components: general inflation and payment for improved characteristics, such as greater durability, safety or performance. National-income measurement attempts to adjust for quality so that the quality-related component is treated as increased real output rather than pure inflation. Therefore A is correct. B denies the importance of product characteristics, C is unsupported, and D is false because real GDP uses prices for valuation even though it holds them constant.

Correct answer: A. Later large quantities may receive an excessively high base-price weight

Explanation: In a fixed-base real GDP calculation, quantities in later years are valued using prices from the selected base year. If the product had an unusually high price initially, that price can give its later quantity an excessive weight even after its market price falls. Consequently, measured real growth may be overstated. Option B is too absolute, while C and D concern neither fixed-base weighting nor GDP valuation.

Correct answer: A. To capture changing economic structure more quickly

Explanation: Chain-weighted real GDP uses price information from nearby years rather than relying permanently on one distant base year. Relative prices and the composition of output can change substantially, so adjacent-year weights better reflect current production patterns and reduce base-year bias. They do not equalise prices, remove nominal GDP, or convert imports into domestic output; therefore option A is correct.

Correct answer: A. It may be a normal result of non-additivity

Explanation: Chain-weighted measures update relative prices and weights across periods. Because each component may be linked using different changing weights, the separately published real components need not add exactly to the aggregate real GDP total. This statistical property is called non-additivity and does not by itself imply an error. Negative nominal GDP or the absence of a deflator base year does not follow from a small discrepancy.

Correct answer: A. Sufficient depreciation of the domestic currency

Explanation: Dollar-valued nominal GDP equals nominal GDP in domestic currency divided by the domestic currency price of one dollar, or equivalently converted at the exchange rate. If domestic nominal GDP rises 8 percent but the currency depreciates enough, each unit of domestic currency buys fewer dollars and the converted figure can fall 4 percent. Appreciation would push the dollar value upward, while output becoming zero or population doubling is not implied.

Correct answer: A. When domestic price levels differ greatly across countries

Explanation: Purchasing-power parity converts currencies according to the amount of goods and services that each currency can buy, rather than only according to a financial-market exchange rate. It is especially useful for comparing real GDP when countries have large differences in domestic price levels. A market rate may make a low-price country appear poorer than its actual purchasing capacity suggests. Options B, C, and D do not state the relevant condition.

Correct answer: A. It will rise

Explanation: Suppose domestic nominal GDP remains 100 units of the local currency. If that currency appreciates, each local-currency unit converts into more dollars, so the same domestic GDP is reported as a larger dollar amount. The calculation changes because of conversion, not because domestic production or prices changed. Thus option A is correct. A fall would follow depreciation, while unchanged output does not imply an unchanged dollar value.