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Question

Difficulty: EasyEconomic Growth, National Income Accounting, and Development Indicators

Consider the following statements regarding national income indicators:

1. Nominal GDP measures an economy's total gross domestic product evaluated using prices of the current year.
2. Real GDP measures economic output using constant base-year prices to isolate the effect of quantity changes from price changes.

Which of the statements given above is/are correct?

  1. A
    1 only
  2. B
    2 only
  3. Both 1 and 2Answer
  4. D
    Neither 1 nor 2

Answer

Both statement 1 and statement 2 are correct.
Both statements are correct. Nominal GDP is calculated using current year market prices, incorporating both physical output changes and price movements. Real GDP holds prices constant at base-year levels to isolate real physical growth from inflationary noise.

Step-by-Step Solution

1
Evaluate Statement 1 regarding Nominal GDP.
Statement 1 is correct because Nominal GDP expresses total output using current market prices without inflation adjustment.
Nominal GDP reflects both volume of production and price fluctuations occurring during the current reporting period.
2
Evaluate Statement 2 regarding Real GDP.
Statement 2 is correct because Real GDP values output using constant prices from a fixed base year.
By keeping prices constant at base-year levels, Real GDP strips out the effect of inflation to reflect actual growth in volume of goods and services.

Key Concept

Real vs. Nominal GDP Accounting
Estimated Time:45s
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Topics

Economic Growth, National Income Accounting, and Development Indicators