Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 7: Q8. (page 152)

Suppose that this year’s nominal GDP is \(16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level 5 years ago. Using that index, we find that this year’s real GDP is \)15 trillion. Given those numbers, we can conclude that the current value of the index is:

a. higher than 100.

b. lower than 100.

c. still 100.

Short Answer

Expert verified

Option (a):higher than 100

Step by step solution

01

Meaning of nominal and real GDP

The nominal GDP shows the unadjusted value of the output produced within the country, and the real GDP shows the inflation-adjusted value of output produced within the country.

The price index is used to convert nominal GDP to real GDP and is given by:

PriceIndex=NominalGDPRealGDP×100

02

Explanation for choosing option (a)

If the nominal GDP in the current year is $16 trillion and the real GDP is $15 trillion, then Price Index will be 106.66, as calculated below.

PriceIndex=NominalGDPRealGDP×100=16trillion15trillion×100=106.66

The price index is 106.66, which is higher than 100. Thus, option ‘a’ is correct.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

A small economy starts the year with \(1 million in capital. During the course of the year, gross investment is \)150,000 and depreciation is \(50,000. What is the economy’s capital stock at the end of the year?

a. \)1,150,000

b. \(1,100,000

c. \)1,000,000

d. \(850,000

e. \)800,000

Contrast nominal GDP and real GDP. Why is one more reliable than the other for comparing changes in the standard of living over a series of years? What is the GDP price index, and what is its role in differentiating nominal GDP and real GDP?

Suppose that this year’s nominal GDP is \(16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level 5 years ago. Using that index, we find that this year’s real GDP is \)15 trillion. Given those numbers, we can conclude that the current value of the index is:

a. higher than 100.

b. lower than 100.

c. still 100.

Why is gross output a better measure of overall economic activity than GDP is? How could you construct a new statistic that focuses only on nonfinal economic activity? Given what you know about the behavior of GO and GDP during the Great Recession, would you expect your new statistic to show more or less volatility than GO and GDP? Why? How would you rank the three in terms of volatility?

Why are changes in inventories included as part of investment spending? Suppose inventories decline by \(1 billion during 2022. How would this \)1 billion decrease affect the size of gross private domestic investment and gross domestic product in 2022? Explain.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free