Chapter 11: Problem 5

Can GDP go up at the same time that real GDP goes down? Explain your answer.

Short Answer

Expert verified

Yes, GDP can increase at the same time that real GDP decreases. This can occur when nominal GDP (not adjusted for inflation) increases due to rising prices, while real GDP (adjusted for inflation) decreases because the economy is not really producing more goods and services.

Step by step solution

Defining GDP

Firstly, it is necessary to know that GDP refers to the economic value of all goods and services produced in a particular country in a given time period. It measures the economic activity and it's usually an indicator of a country's standard of living.

Understanding Nominal GDP

Nominal GDP is a GDP figure that has not been adjusted for inflation. It reflects the current prices of goods and services produced within a specific period. If the prices change from one year to the next, the nominal GDP will change.

Understanding Real GDP

Real GDP is a GDP figure that is adjusted for inflation. This gives us a more 'real' measure of economic growth. In other words, it reflects what GDP would have been if there were no changes in price level.

Making the Distinction

Considering this, it becomes clear that GDP (or nominal GDP) can go up if the prices of goods and services are increasing, even if real GDP is going down. In such a case, the rise in GDP would simply reflect inflation, and not actual economic growth.

Conclusion

So, yes, GDP can go up at the same time that real GDP goes down because nominal GDP is not adjusted for inflation and could increase due to rising prices of goods and services, while real GDP, which is adjusted for inflation, could decrease if the economy is not actually producing more goods and services.