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Explain why, given the fact that the base year is 2000, real GDP in 1970 is...

Explain why, given the fact that the base year is 2000, real GDP in 1970 is much higher than nominal GDP (for the base year)?

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Answer #1

Nominal GDP is the market value of all final goods and services valued at current prices.

Real GDP is the market value of all final goods and services valued at constant prices.

Because of inflation, the price level has increased significantly from 1970 to 2000. So, the price level was lower in 1970 as compared to 2000. Therefore, nominal GDP in 1970 would be very low as the price of all goods and services were low. If 2000 is taken as a base to determine constant price, the constant price in 1970 will be higher than the current price of 1970. So, the real GDP in 1970 would be higher than the nominal GDP of 1970.

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