Question

if prices rise and quantity remains constant, then real GDP and GDP deflator will increase but nominal GDP will remain Constant. Give reasons in support of your answer. (need 500-600 words with figure if possible)

Answer 1

"if prices rises and quantity remains constant, then real GDP and GDP deflator will increase but nominal GDP will remains Constant" before knowing the reason behind this first we should understand some terms-

• Nominal GDP is the market value of the final production of goods and services within a country in a given period using that year’s current prices.

And

• GDP deflator is a price index used to adjust nominal GDP to find real GDP and GDP deflator measures the average prices of all finished goods and services produced within a nation’s borders over time.
• Real GDP is basically nominal GDP adjusted for changes in the price level.

Using prices from a base year which are constant  instead of “current prices” used in nominal GDP

Real GDP alters the level of output for any price changes that may have occurred over time

Real GDP represents how much is actually produced.

Real GDP measures aggregate output using constant prices and removes the effect of changes in the overall price level.

whereas,

Nominal GDP depicts/represents how much is spent on output.

For example, (taking imaginary numbers for better understanding)-

In America  During 2015, $1,994.9 billion was spent on the goods and services produced in America.

Nominal GDP measures aggregate output which means the value of all of the final goods and services produced using current prices. In other words, these figures reflect the amount spent on America’s output in the country’s prices in 2015

For example (taking imaginary numbers for better understanding)-

In 2015 the value of America’s output expressed in constant 2010 prices was $1,857

• And in case of Real GDP -

Taking example (taking imaginary numbers for better understanding)-

In 2015 the value of America’s output expressed in constant 2010 prices was $1,857

• Now coming to GDP Deflator

GDP deflator  tracks price changes of a nation’s output over time.

America’s GDP deflator for its base year of 2010 was 100 since this is the year against which prices are compared. By 2015 the deflator had increased to 107.4  indicating that the average prices of Amerca’s output had increased by 7.4 percent.

By expressing 2015’s output in 2015 prices, therefore, America’s output would appear to have increased by 7.4%, point, more than it actually did.

America’s nominal GDP, which has been inflated by higher prices  can be deflated by dividing the country’s nominal GDP of $1,994 billiont by the deflator expressed in hundredths.

Conclusion

An increase in GDP does not necessarily mean a nation has produced more output; it must be specified whether the GDP in question is nominal or real. An increase in nominal GDP may just mean prices have increased but an increase in real GDP definitely means output increased.

And

The GDP deflator is a price index which means that it tracks the average prices of goods and services produced across all sectors of a nation's economy.