ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -In order to accurately compare GDP between different years, what must be removed from GDP? wages.

Detailed explanation-2: -With an increase in inflation, there is a decline in the purchasing power of money, which reduces consumption and therefore GDP decreases. High inflation can make investments less desirable, since it creates uncertainty for the future and it can also affect the balance of payments because exports become more expensive.

Detailed explanation-3: -In general, calculating real GDP is done by dividing nominal GDP by the GDP deflator (R). For example, if an economy’s prices have increased by 1% since the base year, the deflating number is 1.01. If nominal GDP was $1 million, then real GDP is calculated as $1, 000, 000 / 1.01, or $990, 099.

Detailed explanation-4: -Broadly speaking, there are two main sources of economic growth: growth in the size of the workforce and growth in the productivity (output per hour worked) of that workforce. Either can increase the overall size of the economy but only strong productivity growth can increase per capita GDP and income.

Detailed explanation-5: -Nominal GDP is used when comparing different quarters of output within the same year. When comparing the GDP of two or more years, real GDP is used. This is because, in effect, the removal of the influence of inflation allows the comparison of the different years to focus solely on volume.