Question

In the term "real GDP," what does "GDP" stand for and what does it measure? (5 points)

What does "real" indicate? (5 points)

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next? (5 points)

Answer 1

1

1- The term Real Gross Domestic Product (GDP) is an inflation- adjust measure that reflects the value of all goods and services produced by an economy in a given year. ( expressed in base - year prices) and its often referred to as constant - price. " inflation- corrected; or " constant dollar " GDP .

2- Gross Domestic Product is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year.

3- GDP growth rate is ah important indicator of the economic performance of a country.

4- GDP measures the monetary value of final goods and services- that is , those that are bought by the final user- produced in a country in a given period of time ( say a quarter or a year).

5- It counts all of the output generated within the borders of a country.

2

1- Real values measure the purchasing power net of any price changes over time.

2- Real GDP accounts for inflation and deflation.

3- It transforms the money value measure, nominal GDP, into an index for quantity of total output.

4- The real value of an item,also called its relative price, is its nominal value adjusted for inflation and measures that value in terms of another item.

5- Real values are more important than nominal values for economic measures, such as gross domestic product ( GDP ) and personal incomes .

3

1- The value of final goods and services evaluated at current- year prices.

2- The increase is due partly to changes in prices and partly to changes in quantities.

3- When a country's real GDP is stable or increasing, companies can afford to hire more people and pay higher wages.

4- As a result, spending power goes up as well.

5- A country's real GDP can drop as a result of shifts in demand, increasing interest rates, government spending reductions and other factors. If all prices rise more or less together, known as inflation, then this will make nominal GDP appear greater. Inflation is a negative force for economic participants because it diminishes the purchasing power of income and savings, both for consumers and investors.