Question

1)    Explain what is the difference between real and nominal GDP? 2 ) and explain why do...

1)    Explain what is the difference between real and nominal GDP?

2 ) and explain why do economists need to make this distinction?

3)   Is the CPI a biased measure of the inflation rate? Explain your answer.

Homework Answers

Answer #1

a) Real GDP is the GDP at a base price i.e. the price level of the base year. It is adjusted for the inflation. Nominal GDP on the other hand, is the GDP which is at the current price and not adjusted for the inflation. It includes the price increase in the current year.

b) Economist need to make a distinction because it will lead to an increase in the GDP even if the real output has not increased. The ideal way to measure the increase in the GDP is to measure it at the base rate that will give a correct idea about the increase in the price and actual increase in the output.

c) Yes, CPI doesn't account for the change in quality and the substitution effect in the market. The actual increase in the price is much lower than anticipated by the CPI.  

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. Explain the difference between real GDP and nominal GDP. 2. Discuss the reasons that explain...
1. Explain the difference between real GDP and nominal GDP. 2. Discuss the reasons that explain why GDP is not a perfect measure of economic activity in a country (hint, there are four main reasons 3. What does GDP per capita tell us about a nation's economy? What issues does conventional GDP methodology exclude? 4. Explain how “good institutions” enhance the incentives for entrepreneurship 5. Why are property rights important for economic development?
Explain the difference between nominal and real GDP and why real GDP is necessary to compare...
Explain the difference between nominal and real GDP and why real GDP is necessary to compare prior years’ data.
Explain the difference between nominal and real GDP. Which of the two is a better measure...
Explain the difference between nominal and real GDP. Which of the two is a better measure of economic growth? Why?
Explain the similarities and difference between real and nominal GDP. Under what circumstances would you use...
Explain the similarities and difference between real and nominal GDP. Under what circumstances would you use Real GDP? When would you use Nominal GDP? Your answer should take approximately 1 page
Why do economists prefer real GDP to nominal GDP when measuring the size of an economy?...
Why do economists prefer real GDP to nominal GDP when measuring the size of an economy? Question 8 options: When an economy experiences inflation, its nominal GDP tends to overvalue an actual change in the quantity of goods and serviced produced. Real GDP rises for two reasons: an increase in output and an increase in prices. When an economy experiences inflation, its real GDP is greater than its nominal GDP. Nominal GDP is GDP adjusted for inflation.
Explain why the traditional fixed-weighted measure of real GDP is preferred to nominal GDP for assessing...
Explain why the traditional fixed-weighted measure of real GDP is preferred to nominal GDP for assessing changes in an economy’s production over time.                                                                                                                         Explain why a chain-weighted                measure of real GDP is preferred to the traditional fixed-weighted measure of real GDP.
3. Distinction Between Real and Nominal Interest Rates a. Distinguish between a nominal versus a real...
3. Distinction Between Real and Nominal Interest Rates a. Distinguish between a nominal versus a real interest rate. b. If a bond gives you a 4% nominal annual interest rate and the inflation rate over the year is 2%, what is the real ex post rate of return you receive? Real Rate You Receive _______________ c. If an investor wants a real rate of return of 2% and expects inflation to be 2% next year, what nominal rate should the...
This exercise deals with the difference between nominal and real GDP, and also explores the characteristics...
This exercise deals with the difference between nominal and real GDP, and also explores the characteristics of the components of GDP over time. Show all work and formulas Instructions Go to BEA.gov and in the U.S. Economic Accounts find Table 1.1.5 (nominal GDP) and Table 1.1.6 (real GDP) and download them for the period 1960 to the latest available year in annual frequency (yearly). In Excel plot line 1 of both tables within a single graph. Where do they cross?...
Describe the difference between nominal and real interest rates. Calculate the missing value in each of...
Describe the difference between nominal and real interest rates. Calculate the missing value in each of the following scenarios: Expected inflation is 4% and the nominal interest rate is 6%, what is the real interest rate? The real interest rate is 2% and the nominal interest rate is 3%, what is expected inflation? Expected inflation is -1% and the real interest rate is 1%, what is the nominal interest rate?
Please explain the difference between the nominal and real interest rate in the short-run and the...
Please explain the difference between the nominal and real interest rate in the short-run and the long-run. How and why does the quantity theory help us understand the relationship between the money supply, interest rates and inflation? How and why are nominal interest rates so low in the U.S. today? Please all the tools at your disposal to demonstrate your understanding of the market today.