Problem 3 (10). Can nominal GDP ever be less than real GDP?

Problem 3 (10). Can nominal GDP ever be less than real GDP?

Solutions

Expert Solution

No nominal GDP can't always be less than real GDP.

GDP is the monetary value of all the goods and services produced within the boundaries of a country during a specified period of time, normally a year.

Nominal GDP: Nominal GDP is the GDP measured at current prices and without inflation adjustment.

Real GDP : It is the GDP measured at constant prices and adjusted against the effects of inflation.

When there is inflation in the economy, nominal GDP will be higher than real GDP.

For example, say a country produces only mobiles, so it's GDP = Number of mobiles * price
In 2016 it produces 20 mobiles for $100 each. So the GDP is $2000.
In 2017 it produces 10 mobiles with 10% inflation, a price of $110 each. Thus, nominal GDP is $1100. The real GDP is $1000.

Thus the nominal GDP is higher than real GDP in case of inflation only.
In case of deflation, nominal GDP is lower than real GDP.

Most of the time, the economy has a slight inflation rate. This means that nominal GDP will be higher because it is not adjusted with inflation. Real GDP is adjusted with inflation so it is lower than nominal GDP.

Rahul Sunny answered 1 year ago

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