Question

The total value of commodity A produced in Country X increased from​ $500,000 in 2011 to​ $700,000 in 2012. According to​ Laura, a student of​ economics, the share of commodity A in real GDP of 2012 should be higher than that of 2011.
Which of the​ following, if​ true, would strengthen​ Laura's argument?

A.

Only a fraction of commodity A produced in 2012 was consumed in the same year.

B.

The total amount of inputs used in the production of commodity A was higher in 2011 than in 2012.

C.

The scale of production in 2012 was smaller than in 2011.

D.

The average price level in the economy remained stable over the two years.

E.

The quantity of commodity A produced in 2011 was higher than in 2012.

Answer 1

Answer:

D. The average price level in the economy remained stable over the two years.

Explanation:

Real GDP is a GDP measured using the price of a certain base year as opposed to GDP measured at current prices known as nominal GDP. GDP at current prices may be affected by inflation or deflation and must be deflated if the economy is experiencing inflation. The value of $700,000 for commodity A in 2012 is supposed to deflated to remove the effect of inflation and the value will come back to 2011 value of $500,000 , but if the price level is fairly stable the GDP deflator can not bring it back to $500,00, but some higher value.