CSEET · Economic and Business Environment · National Income Accounting and Related Concepts
Between two years, a nation's nominal GDP rises by 12% while the general price level rises by 12%. Which conclusion about real output is correct?
Real output is roughly unchanged. Nominal GDP growth of 12% is fully matched by a 12% rise in prices, so the increase reflects only inflation. Real GDP, which removes price effects, shows no meaningful growth over the two years.
- AReal output has remained approximately unchangedCorrect
- BReal output has risen by 24%
- CReal output has fallen by 12%
- DReal output has doubled
Explanation
Real GDP is nominal GDP adjusted for price change. With nominal growth equal to inflation, the entire rise is due to prices, so real output is essentially unchanged. Adding the two rates (24%) wrongly treats inflation as growth.
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