Answer to Question #132699 in Microeconomics for Mehtab Ali

Question

Suppose that in Year 1 a firm produces 5 cars valued at $10,000 each. It has contributed $50,000
to GDP. In Year 2 its contribution is $60,000. Has the firm produced more cars? Why eliminating price
changes allows us to see more clearly whether or not there have been output changes

Answer 1

GDP measures the quantity of the actual produce.Real GDP hence measures the aggregate output with a constant price.Price is assumed constant to remove the effect of change in overall price level.

when you weigh GDP using price of the base year brings about overstatement of real GDP since price decreases over time.Hope this helps to understand better too.

Increase in GDP does not mean there is increased output.When GDP is nominal then that indicates price has increased while increase in real GDP indicates output has increased.