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CSEET · Economic and Business Environment · Indian Economy

India's nominal GDP grew by 11% in a year while the general price level, measured by the GDP deflator, rose by 5%. Which statement best describes the position?

Real GDP grew by roughly 6%. Nominal GDP growth includes the effect of rising prices, so the inflation rate shown by the GDP deflator, 5%, must be removed from the 11% nominal growth to find the actual increase in output.

  1. AReal GDP grew by roughly 6%Correct
  2. BReal GDP grew by roughly 16%
  3. CReal GDP grew by roughly 55%
  4. DReal GDP did not grow at all

Explanation

Real growth is approximately nominal growth minus inflation: 11% − 5% = about 6%. Adding the two figures gives 16%, which confuses the direction of the price adjustment. Since nominal growth exceeds inflation, real output did grow.

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