Question

In comparing GDP data over a period of years, a difference between nominal and real GDP may arise because:

Answer 1

Answer:

of changes in price level

Explanation:

Gross domestic product is the total sum of final goods and services produced in an economy within a given period which is usually a year.

Nominal GDP is GDP calculated using current year prices while Real GDP is GDP calculated using base year prices. Real GDP has been adjusted for inflation.

For example, country A produces 10 kg of rice at $10 per kg in 2019 and 50kg of beans at $30 per kg in 2018. In 2019, it produces 10 kg of rice at $20 per kg in 2019 and 50kg of beans at $40 per kg in 2019. 2018 is the base year.

Nominal GDP in 2018 = (10 x $10) + (50 x $30) = $1600

Nominal GDP in 2019 = (10 x $20) + (50 x $40) = $2200

Real GDP in 2018 = (10 x $10) + (50 x $30) = $1600

Real GDP in 2020 = (10 x $10) + (50 x $30) = $1600

We can see that even though the country produced the same quantity of outputs in both years, nominal GDP differed but when the effect of rise in prices was eliminated, real GDP for both years was the same.