Chapter 11, Problem 6MCQ

To determine

The question requires us to determine the factor which causes real GDP to exceed nominal GDP.

Explanation of Solution

To remove the effect of price change (or inflation), the base-year price is used in the calculation of Real GDP while the current-year price is used in the calculation of nominal GDP.

If the real GDP in a year is greater than the nominal GDP in the same year, then it reflects the higher price in the base year.

If the real GDP in a year is less than the nominal GDP in the same year, then it reflects prices were lower in the base year than in the current year.

So, in the current year if real GDP exceeds nominal GDP, then the price level has reduced significantly since the base year.

Option “c” is correct.

The other options are incorrect because:

• A change in aggregate output causes the GDP to change, it can be nominal GDP or real GDP based on the estimation method. For example, if the base year price is used to calculate the cost of the basket, then the estimation will give the value of real GDP and when the current year price is used to calculate the cost of the basket, then the estimation will give the value of nominal GDP.
• An increase in population will impact the value of GDP per capita.
• All three approaches to calculating GDP give the same value of GDP in an economy.