Question

Let assume that nominal GDP in 2010 increased by 6% (over its previous level in 2009). With this information, we can say that: Question 2 options:

either output or prices increased in 2010.

the GDP deflator increased during 2010.

both the GDP deflator and real GDP increased during 2010.

only prices increased in 2010.

real GDP increased during 20010.

Answer 1

Let assume that nominal GDP in 2010 increased by 6% (over its previous level in 2009).

So, if nominal GDP in 2009 was x, then after the increase in 2010, nominal GDP is now at 1.06x.

Now, we know that nominal GDP is the market value of all final goods and services produced in the economy.

So, nominal GDP in 2009 = Prices in 2009 * Quantity in 2009.

Similarly, nominal GDP in 2010 = Prices in 2010 * Quantity in 2010.

However, real GDP measures the value of all final goods and services produced in a given time period accounting for inflation. So real GDP is calculated using base year prices.

So, real GDP in 2009 = Prices in base year * Quantity in 2009.

Similarly, real GDP in 2010 = Prices in base year * Quantity in 2010.

GDP Deflator is the price index that calculated inflation (positive or negative) in the economy and is given as a ratio of nominal GDP to real GDP.

Mathematically, GDP Deflator = Nominal GDP/Real GDP * 100.

Thus, we can say that nominal GDP in 2009 = P2009 * Q2009 = x and

nominal GDP in 2010 = P2010 * Q2010 = 1.06x.

Thus, we can say that either prices or quantity or both have increased in 2010 compared to 2009 as a result of which GDP in 2010 has risen by 6%.

So, Option A is the correct answer.