Chapter 11: Problem 2

Gross domestic product is $\$ 6,000$ billion in one year and $\$ 6,500$ billion the next year. Is output necessarily higher in the second year than in the first? Explain your answer.

Short Answer

Expert verified

No, output is not necessarily higher in the second year than in the first. Even though GDP is higher in the second year, this could be due to inflation, i.e., higher price levels, rather than an increase in the quantity of goods and services produced. Additional data like a price index would be required to definitively determine changes in output.

Step by step solution

Understand GDP

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. It serves as a comprehensive measure of a nation’s overall production and economic health.

Comparing GDP values

Here, we have two GDP values: \$6,000 billion for the first year and \$6,500 billion for the second year. The GDP for the second year is greater than that for the first year.

Understanding the relationship between GDP and Output

Higher GDP figures suggest a rise in the production of goods and services, which we typically assume to mean a rise in output. However, it's essential to remember that GDP is affected by many factors, including price levels or inflation.

Consider Inflation

If there was inflation between the first and second year, then the higher GDP in the second year does not necessarily mean higher output. Inflation causes higher price levels, so it could be the case that the same amount of goods and services (or even less) from the first year cost more in the second, leading to a higher GDP without an increase in output.

Final Conclusion

In conclusion, without information on changes in price level between the two years, it's impossible to definitively say that output is necessarily higher in the second year than in the first. To confirm a rise in output, we would need additional information such as the GDP Deflator or Consumer Price Index, which would allow us to adjust for inflation