Question

Year                                      P index	nominal GDP
1                                           88	50
2                                           96	52
3                                           100	52
4                                           100	47
5                                           98	47
6                                           99	48
7                                           100	52
8                                           105	58

1.Let us begin our analysis with pairs of years where either GDP or the P index remained the same.

a)From year 2-3, nominal GDP stayed the same while prices rose. Hence real GDP rose/fell?

b)In 3-4 prices stayed the same while nominal GDP fell, so real GDP rose fell?

c)In 4-5 nominal GDP stayed the same while prices fell. Hence real GDP rose/fell?

2. In 5-6 both measures rose but which rose more? If output rises faster than prices then real GDP rises which was/not the case.

3. In 6-7 both measures rose but prices barely rose, so real GDP rose/fell?

Answer 1

For easier understanding let us calculate the Real GDP of each year and then compare ;

Real GDP for

y1 = 50/88 * 100 = 56.82

y2 = 52/96 * 100 = 54.17

y3 = 52/100 * 100 = 52

y4 = 47/100 * 100 =47

y5 = 47/98 * 100 = 47.96

y6 = 48/99 * 100 = 48.48

y7 = 52/100 * 100 = 52

y8 = 58/105 * 100 = 55.24

apart from the calculations we can see that in the formula price is the denominator ,so with nominal GDP remaining constant if price rise the real GDP falls and visa versa ...;.. and nominal GDP is numeration, so with price being constant if nominal GDP rises then real GDP rises and visa versa.

if both change then we must see on which side is the % change higher and then follow the above rule again.

using the above statements alone we can find the answer to your question but for clarity lets use the real GDP figures.

a.

since nominal GDP is same but price rose , therefore , Real GDP fell. ...............{ from 54.17 to 52}

b.

since nominal GDP fell but price remained constant , therefore, Real GDP fell .......{from 52 to 47}

c.

since nominal GDP stayed constant but price fell, therefore , Real GDP rose ........ { from 47 to 47.96}

2.

As we can see the nominal GDP rose from 47 to 48 which is a 2.13% increase and the price increase from 98 to 99 which is a 1.02% increase , therefore , Nominal GDP rose more .......{hence real GDP rose from 47.96 to 48.48}

3.

since the question mentions that prices barely rose and nominal GDP rose more , therefore , Real GDP rose.