Answer to Question #132759 in Microeconomics for Jahangeer Khan

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

Solution:

a.). If it is Real GDP, and it has increased from $50,000 to $60,000, then it means that the firm has produced more cars in Year 2 than Year 1; that is, there was an increase in real output.

If it is Nominal GDP, and it has increased from $50,000 to $60,000, then it means that the firm did not necessarily produce more cars, but there was an increase in car prices per unit.

b.). Eliminating price changes will not distort GDP, and it will ensure that GDP is measured using constant prices, and hence clear output changes on GDP will be determined.