Question

(a) Understanding of economic concepts and terms (maximum half-page) TRUE, FALSE, MAYBE and EXPLAIN: “A country’s real GDP increases as its inflation rate increases.” Explain using half pages of A4 paper.

Answer 1

This statement is a FALSE statement.

GDP refers to the market value of all final goods and services produced in an economy in a given year. There are two types of GDP - real and nominal GDP. Real GDP takes the change in price level i.e. the inflation rate into consideration. Real GDP is calculated on the basis of the base year prices. Therefore, change in the current year price does not have an impact on the real GDP. On the other hand, nominal GDP does not take the change in price level i.e. the inflation rate into consideration. Nominal GDP calculated on the basis of the current year prices. Therefore, the nominal GDP is affected on the basis of changes in the current year prices. So, nominal GDP increases when inflation rate increases but real GDP remains the same.