Question

1. Assume that in one year an economy produces 5,000 units of output and they sell for $120 a unit, on average. In year 2, the economy produces the same 5,000 units of output, and sells it for $200 a unit, on average. What happened to the nominal GDP and to real GDP between years 1 and 2? Why?

Answer 1

The information given in the question can be categorized in below table

Year	Output	Price	Nominal GDP	Real GDP
Year 1	5000	$120	=(Output of year1)x(Price of yar1)=5000x120=$600,000	=(Output of year1)x(Price of yar1)=5000x120=$600,000
Year 2	5000	$200	=(Output of year2)x(Price of yar2)=5000x200=$1,000,000	=(Output of year2)x(Price of yar1)=5000x120=$600,000

There is Increases Nominal GDP from year 1 to year 2

Explanation: it is clearly evident from the above table the nominal GDP which is obtained by multiplying the current year price with the current year quantity increases with from year 1 to year2. The nominal GDP do not shows the inflation adjusted output in the economy because its estimates always take the current year price and current year quantity in an economy.

Real GDP remains constant from year 1 to year 2

Explanation: it is clearly evident from the above table the real GDP remains same in year1 to year 2. In order to estimate the real GDP in year 2 we have multiplied the output of year2 with the price of year1. Though in real terms there is no increase in output from year 1 to year2 so the real GDP remains constant from year 1 to year2. In other words the real GDP shows the inflation adjusted output in the economy.