Question

Compare your answers to the previous two questions. What accounts for the difference between Nominal and Real GDP in year 2, using year 1 as the base year? (Choose all that apply).

		Real GDP values year 2's output in year 1's prices, while Nominal GDP values year 2's output in year 2's prices. Because year 2's prices are higher than year 1's prices, Nominal GDP is higher than Real GDP in year 2.
		Real GDP is lower than Nominal GDP because Real GDP only rises if prices rise, while Nominal GDP rises if either prices or quantities rise.
		Nominal GDP is greater than Real GDP because Nominal GDP is distorted by inflation.
		Nominal GDP is lower than Real GDP because it is computed using base year prices, while Real GDP is computed using current-year prices

Answer 1

The nominal GDP is the value of goods and services produces within the border of the country during a particular period. The real GDP is the value of goods and services produced within the country during a particular period at some base year prices. The difference between nominal and real GDP is that the format accounts for the change in price level. As the real GDP is calculated in single base year prices, it is often smaller than nominal value. This is because inflation is always positive between two years. The prices are generally higher in the current year than it was in the base year.

Therefore, the correct option is:

• Real GDP values year 2's output in year 1's prices, ..........., Nominal GDP is higher than Real GDP in year 2.