Question

INDICATE WHETHER THE FOLLOWING ARE TRUE OR FALSE AND EXPLAIN WHY.

• In periods of rising prices real GDP will rise faster than nominal GDP.

• The value of goods produced, but not sold during the year, decreases GDP.

• The advantage gained in using the real GDP measure is that it removes the distortions caused by price increases.

• Profits earned by General Motors by operating a factory in Brazil are included in GDP as a part of corporate profits.

• Purchase of a plot of land increases nominal GDP.

• If shares of IBM are sold the value of the services provided by the financial services company is a part of GDP, but the value of the stock is not.

Answer 1

1. In periods of rising prices, real GDP will rise faster than nominal GDP.

Answer- False

Reason- There is high inflation condition in the economy. This will automatically increase the nominal GDP without any real increase in GDP (as prices of all goods and services will be increased).

Nominal GDP= GDP at current prices.

Real GDP= GDP at constant prices. (it adjusts against inflation).

As the definition suggests nominal GDP is sensitive to prices and real GDP takes into account inflation. So the actual result will be quite the opposite.

2. The value of goods produced, but not sold during the year, decrease GDP.

Answer- False.

Reason- The value of goods that have been produced but not sold during a given time period are called increases in business inventories and counted as Investment in GDP. It does not affect GDP as by definition GDP is the summation of everything produced and sold in a country.

3. The advantage gained in using the real GDP measure is that it removes the distortions caused by price increases.

Answer- True

Reason- Real GDP tracks the total value produced using constant prices, isolating the effect of price changes. As a result, real GDP is an accurate gauge of changes in the output level of an economy.

4. Profits earned by General Motors by operating a factory in Brazil are included in GDP as a part of corporate profits.

Answer- False

Reason- These kinds of goods are termed as intermediate goods ( goods manufactured by a company in a different company ) and do not count towards the GDP of the home country ( in our case the United States) as such counting would lead to double counting and lead to incorrect data.

5. Purchase of a plot of land increases nominal GDP.

Answer- False

Reason- There is only a change in GDP to the extent there are market goods and services used in the sale and only those goods and services are counted. The actual sales revenue are irrelevant. For example, the home inspection, appraisal, mortgage closing costs, brokerage fees, and etc. would be considered in GDP. On the other hand, If you and your brother swapped houses without getting the market, bank, or tax authority involved, there would be no change in GDP.

6. If shares of IBM are sold the value of the services provided by the financial services company is a part of GDP, but the value of the stock is not.

Answer- True.

Reason- When people buy stocks and bonds they generally but it from third party and very rarely from IPO( Initial Public Offering), Therefore, when the financial services company provides their services it will be the part of GDP, but the in stock which is purchased does not produce anything extra than before and that’s why stock is not included in GDP. The stock does not produce anything tangible for it to add direct value to count of GDP in an economy.

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