Question

Suppose a small economy produces only MP3 players. IN year 1, 10,000 MP3 players are produce and sold at a price of $100 each. in year 2, 12,000 MP3 players are produced and sold at a price of $80 each. Which of the following statements is true?
A) Real GDP and nominal GDP both increase
B) Real GDP increase while nominal GDP remains constant
C) Real GDP decreases while nominal GDP increases
D) Real GDP increases while nominal GDP decreases

Answer 1

Answer:

The correct answer is option D.

Explanation:

A small economy produces only MP3 players.

In year 1, 10,000 MP3 players are produce and sold at a price of $100 each.

In year 2, 12,000 MP3 players are produced and sold at a price of $80 each.

GDP in year 1

= $10,000\ \times \ 100$

= 1,000,000

Nominal GDP in year 2

= $12,000\ \times \ 80$

= 960,000

Real GDP in year 2

= $12,000\ \times \ 100$

= 1,200,000

The real and nominal GDP for year 1 will be the same. For year 2 nominal GDP is calculated on the current prices while real GDP is calculated on constant prices.

We see that real GDP has increased as the quantity of output has increased. Nominal GDP has decreased because the price has decreased.