Question

2. Under what conditions may nominal GDP be increasing while real GDP is falling at the same time?

Answer 1

• We know that nominal GDP is the gross domestic product that is evaluated at current market prices and hence it will be affected by the price changes that has occurred in the market economy due to an increase or decrease in inflation or deflation.
• While the real GDP refers to the value of all goods and services produced within an economy which is already adjusted for the changes in inflation and deflation.
• Nominal GDP will be increasing while real GDP is falling when the there is higher inflation in the economy, but for a shorter period of time.
• During inflation, the price's of all goods and services increase, which will in turn increase the nominal GDP as it is affected by the rise in prices and it is not already adjusted for inflation and deflation, but as real GDP is already adjusted for inflation and deflation it does not undergo any change again during a period of inflation.
• Real GDP will then start to decrease due to negative ecomomic growth When the nominal GDP is growing due to high inflation.
• But this occurs only for a shorter period of time, eventually the real GDP will start to increase as Higher inflation leads to a positive growth in the economy.