Question

Real GDP may increase even when total production remains constant because:

i) there might be a shift in the economy from household production to market production

ii) some illegal market transactions are legalized

a) neither i or ii

b) both i and ii

c) i only

d) ii only

Answer 1

The GDP can be defined the market value of all goods and services which are produced in the domestic territory of the country in the current financial years. GDP by Expenditure method

GDP=C+I+G+X-M

Since real GDP is inflation adjusted because it is calculated based on the base year prices rather than current year prices.

Real GDP may increase even when total production remains constant because:

i) there might be a shift in the economy from household production to market production

ii) some illegal market transactions are legalized

This is because if there is a shift of production from household to market production, then value of market may be greater than household goods value. Second statement will also leads to an increase in the real GDP.

Hence option b is the correct answer.