Real vs. Nominal GDP Flashcards

If nominal GDP rises from $20 trillion to $22 trillion but the price level rises by 10%, what happened to real GDP?

Answer: It stayed the same

A 10% nominal increase offset entirely by 10% inflation leaves real GDP unchanged.

The GDP deflator for 2024 is 115 (base year 2020=100). If nominal GDP is $23 trillion, what is real GDP?

Answer: $20 trillion

Real GDP = (Nominal GDP / GDP deflator) × 100 = ($23T / 115) × 100 = $20 trillion.

Which scenario represents an increase in real GDP with no change in nominal GDP?

Answer: Prices fall while output stays the same

If prices fall and output is unchanged, nominal GDP stays the same but real GDP rises because the deflator decreased.

A country's real GDP fell despite a rising nominal GDP. This most likely means:

Answer: Inflation exceeded the growth rate of nominal GDP

Real GDP falls when the price level rises faster than nominal GDP, eroding real purchasing power.

Which of the following is NOT used to adjust nominal GDP to real GDP?

Answer: Unemployment rate

The unemployment rate measures labor market conditions and is not a price measure used to deflate GDP.

If real GDP grows at 3% and the GDP deflator rises at 4%, then nominal GDP growth is approximately:

Answer: 7%

Nominal GDP growth ≈ real GDP growth + inflation rate = 3% + 4% = 7%.

Why do economists prefer real GDP over nominal GDP when comparing economic output across different years?

Answer: Real GDP removes the effect of price changes, isolating actual output changes

Real GDP holds prices constant at a base year level, so changes reflect true changes in the quantity of goods and services produced.