Question

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If a nation's nominal GDP grows from 1 billion to 1.1 billion in successive years, but had 20% inflation during that time period, what is the "real" change in GDP?

Answer 1

To find the real change in GDP, we need to adjust for inflation. We can do this by using the GDP deflator, which is a measure of the overall price level in the economy. The GDP deflator is calculated as follows:
GDP deflator = (Nominal GDP / Real GDP) x 100
Rearranging this formula, we can solve for Real GDP:
Real GDP = Nominal GDP / (GDP deflator / 100)
In the first year, nominal GDP is 1 billion. In the second year, nominal GDP is 1.1 billion, but we need to adjust for inflation. If there was 20% inflation during that time period, the GDP deflator would be 120 (i.e., everything costs 20% more than before). Therefore, the real change in GDP is:
Real GDP 2 - Real GDP 1 = (Nominal GDP 2 / (GDP deflator 2 / 100)) - (Nominal GDP 1 / (GDP deflator 1 / 100)) Real GDP 2 - Real GDP 1 = (1.1 billion / (120 / 100)) - (1 billion / (100 / 100)) Real GDP 2 - Real GDP 1 = 916.67 million
Therefore, the real change in GDP is 916.67 million.

Answer 2

ANSWER :

If a nation's nominal GDP grows from 1 billion to 1.1 billion in successive years, but had 20% inflation during that time period, the "real" change in GDP is 0.

Real GDP is calculated by adjusting nominal GDP for inflation. We can use the formula:

Real GDP = Nominal GDP / Price level

If we assume that the price level was 100 in the first year and 120 in the second year (due to 20% inflation), we can calculate the real GDP in the second year as:

Real GDP = 1.1 billion / 1.2 = 0.9167 billion

The real GDP has decreased from 1 billion to 0.9167 billion, indicating that there has been no "real" change in GDP.