If nominal GDP increases from one year to the next, then Question 16 options: a. production...

If nominal GDP increases from one year to the next, then Question 16 options:

a. production must have increased.

b. production could have increased, decreased, or stayed the same.

c. prices must have increased.

d. prices and production must both have increased.

e. prices and production must both have decreased.

Solutions

Expert Solution

Nominal GDP is the final value of all goods and services produced in a geographical region in a year. It is calculated by multiplying the total output produced in an year by its current price. Thus, an increase in nominal GDP can be because of increase in output or increase in current prices or both.

Suppose an economy produces a Good A. The economy produced 7,000,000 units of Good A in 2018. The price of Good A in 2018 was $1. Thus the economy's Nominal GDP in 2018 is $7,000,000. Now, suppose in 2019 , the economy again produced 7,000,000 units of good A but the price of Good A increased from 1$ to $2 in 2019. The economy's Nominal GDP in year 2019 is $14,000,000. The production remained same, but the Nominal GDP increased due to increase in price.

The economy's Nominal GDP could have increased even if the production fell to 5,000,000 units but price increased to $2. The economy's GDP could have increased due to increase in production to 10,000,000 units and if the price have decreased to $0.75.

Thus, If nominal GDP increases from one year to the next, the production could have increased, decreased or stayed the same.

The correct answer is b.

Rahul Sunny answered 10 months ago

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