A country reported a nominal GDP of $115 billion in 2010 and $125 billion in 2009...

A country reported a nominal GDP of $115 billion in 2010 and $125 billion in 2009 and reported a GDP deflator of 85 in 2010 and 100 in 2009. What happened to real output and prices from 2014 to 2015? Please explain.

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Expert Solution

According to the question in the year 2009, the Nominal GPD is equal to the Real GDP meaning that there is no inflation in that time period. This means that the real output and price level in that year is equal to the nominal level of output (real output adjusted for inflation) and the same is with price level, one reason behind this could be that 2009 is taken as the base year or inflation is same as it was in the base year. In the year 2010 the Real GDP is greater than Nominal GDP, this happens in very rare cases such as a Deflationary period (for example, the USA depression where, rather than prices rising , the general price level of goods and services decreased and causing a deflation, in the US between 1930-1933). Here the real output is valued more than nominal output because there is negative percentage of inflation or in other terms deflation, same with real price level, it would be higher than nominal price level.

Assuming that the country has gotten out of the deflation, then the real output and price level would be lesser in value to nominal output and price level as they would both be adjusted for inflation from the base year, same for nominal GDP ( it would be higher than Real GDP). If the country is still in a deflationary period then the same would happen as it did in 2010, the real GDP, output and price level would be higher than the nominal GDP, output and price level.

Rahul Sunny answered 3 months ago

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