ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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goes up approximately 2%
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goes up approximately 10%
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goes up approximately 20%
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goes up approximately 30%
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Detailed explanation-1: -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-2: -An increase in GDP does not necessarily mean a nation has produced more output; it must be specified whether the GDP in question is nominal or real. An increase in nominal GDP may just mean prices have increased, while an increase in real GDP definitely means output increased.
Detailed explanation-3: -What Is the Effect of Inflation on Nominal GDP? Inflation will cause nominal GDP to rise, meaning that in looking at year-over-year changes, a rise in nominal GDP does not necessarily reflect economic growth but rather reflects the inflation rate within that period.
Detailed explanation-4: -The calculation which factors inflation to get real GDP is as shown below: Real GDP = GDP/ (1 + Inflation since base year) Base in this formula refers to a chosen year in which the government does periodic updates and also used when comparing economic data like the GDP.