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CA Foundation · Business Economics · Determination of National Income

The GDP deflator for an economy is defined as the ratio of:

The GDP deflator is nominal GDP divided by real GDP, multiplied by 100. It measures how much of the change in nominal GDP is due to price changes relative to the base year. Inverting the ratio would give an incorrect index that falls when prices rise.

  1. AReal GDP to nominal GDP, multiplied by 100
  2. BNominal GDP to real GDP, multiplied by 100Correct
  3. CNominal GDP of the current year to nominal GDP of the base year, multiplied by 100
  4. DReal GDP of the current year to real GDP of the base year, multiplied by 100

Explanation

The GDP deflator = (Nominal GDP / Real GDP) × 100. It captures the price level change embedded in nominal GDP. Option A inverts the ratio, which would give a value below 100 whenever prices have risen above base-year levels.

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