Question

Real GDP decreases from 2007 to 2008. We can conclude that?

Answer 1

Gross Domestic Product [GDP] refers to the value of all goods and services produced by a country in a year. Real GDP is an inflation-adjusted measure of GDP which is expressed in terms of the base price or constant prices. Since a real GDP takes in to account the price level variations over the years, it gives a better understanding of the economic growth of a nation when compared to the nominal GDP values of an economy. Thus, the major difference between a real GDP and a nominal GDP is that a nominal GDP is based on the current prices whereas real GDP is based on a base price and takes in to effect the factor of inflation rates which makes it a better indicator than nominal GDP.

                              Real GDP = Nominal GDP/GDP Deflator

A decrease in the real GDP could be caused due to the following effects or in other words, a decline in the real GDP would mean the following may have occurred in the economy.

· The real GDP of a nation could fall due to a shift in the demand in the economy. For example, if there are increases in the wages, it could result in more disposable income, but a decline can cause the disposable income to reduce which could result in the reduction of consumer spending in the economy leading to a fall in the GDP levels. Thus, it can be analysed that a shift in demand may have occurred in 2007-2008 period which could have resulted in the fall of Real GDP.

· With increase in interest rates, it indicates an inflationary condition and thus results in the real GDP to fall. Thus, a fall in real GDP could mean that the interest rates have risen in the country from 2007 to 2008.

· As interest rate rises, the government spending would be reduced so as to contain the inflation which would lead to a decline of Real GDP. Thus, a decreased government spending could also be a cause for the decline in the Real GDP in 2008 when compared to the 2007 levels.

                               The above are a few reasons for the prediction of a fall in the Real GDP. Since it is attached to the inflationary rates, any variations in the inflation could cause a change in the Real GDP levels of the economy. Thus, it would also represent a much better indicator of the economic progress of a nation.