Answer to Question #186563 in Microeconomics for Sally

Question

Suppose an economy produces only two goods: Apples and Bananas in both Year 1 and Year 2. Is it possible for the Real GDP of this country to increase between Year 1 and Year 2, while the nominal GDP decreases or remains the same?

If your answer is yes, construct a numerical example demonstrating this using Year 1 as the base year. Use the table below to construct your example and show all relevant calculations.

Answer 1

The nominal GDP is given by:

$GDP=P\times Q$

Where P is the price level and Q is the real GDP.

If the real GDP increases while the price level remains the same, the nominal GDP will increase as well.

If the real GDP increases while the price level decreases, the nominal GDP will decrease.

Therefore, it is possible for the real GDP to increase while the nominal GDP decreases.