Which one of the following statements is not correct?
- (a)Real GDP is calculated by valuing outputs of different years at common prices.
- (b)Potential GDP is the real GDP that the economy would produce if its resources were fully employed.
- (c)Nominal GDP is calculated by valuing outputs of different years at constant prices.
- (d)Real GDP per capita is the ratio of real GDP divided by population.
Correct — C, Nominal GDP is calculated by valuing outputs of different years at constant prices. That sentence describes real GDP, not nominal GDP, and it is the swap the item is built around. The school text is explicit on both halves: 'Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or constant prices)', while 'Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices.' Constant prices belong to the real series and current prices to the nominal series. The reason the distinction matters is the whole point of national-income accounting: if you hold prices fixed at a base year, any movement in the total must come from the volume of output, so real GDP measures production; if you let prices run at whatever they are in each year, the total moves with prices as well as with output, which is why nominal GDP can rise in a year when nothing extra was produced.
- (a)Real GDP is calculated by valuing outputs of different years at common prices. — This one is correct, so it cannot be the answer to a 'not correct' stem. 'Common prices' is the same idea as constant or base-year prices — one price set applied to every year's output so that only quantities move.
- (b)Potential GDP is the real GDP that the economy would produce if its resources were fully employed. — Also correct. Potential GDP is a benchmark, not an observation — the output the economy could sustain with its labour and capital fully used. The gap between actual and potential output is the output gap, and question 26 of this same paper asks you to name it in the case where actual falls short.
- (d)Real GDP per capita is the ratio of real GDP divided by population. — Correct as stated, and the standard per-head measure. It is real GDP, not nominal, that is divided by population when living standards over time are being compared, precisely so that price change does not masquerade as growth.
Gross domestic product can be measured at the prices actually prevailing in each year, giving nominal GDP, or at one fixed set of base-year prices, giving real GDP. Only the real series tracks the volume of production, which is why growth rates are quoted from it. The ratio of nominal to real GDP is the GDP deflator, the broadest available index of prices in an economy. Potential GDP is a third, different idea — not what was produced but what could have been produced with resources fully employed.
Three of the four statements here are textbook definitions and only one has been tampered with, so the fast route is to read each sentence for the price basis it names. Constant prices for real GDP is right; constant prices for nominal GDP is the planted error. A useful check with numbers: if a country makes 100 loaves at Rs 10 in the base year and 110 loaves at Rs 15 the next, nominal GDP is Rs 1,650 while real GDP at base-year prices is Rs 1,100 — output rose by a tenth, the nominal figure by nearly two-thirds, and the difference is entirely price. Note that the stem does not say 'about GDP'; it is a bare 'not correct' item, so read all four before committing.
- Real GDP values each year's output at one fixed set of base-year prices; nominal GDP values it at that year's own prices.
- GDP deflator is the ratio of nominal GDP to real GDP, and is a widely used price index.
- Potential GDP is the real output the economy would produce with its resources fully employed; the difference from actual output is the output gap.
- Real GDP per capita divides real GDP by population, and is the usual comparison of living standards across time.
- India's national accounts are published by the National Statistical Office; the base year for the current constant-price series is 2011-12.
Constant prices go with the real series. The item simply attaches them to the nominal series instead.
- Reading 'constant prices' as a property of the nominal series; it belongs to the real series.
- Treating potential GDP as a forecast of next year's output rather than a full-employment benchmark.
- Assuming a rise in nominal GDP proves that more was produced.
Usually as a spot-the-wrong-definition item on real and nominal GDP, or as a small numerical asking for the GDP deflator from a nominal and a real figure.
The national income of a country for a given period is equal to the
- (a) total value of goods and services produced by the nationals
- (b) sum of total consumption and investment expenditure
- (c) sum of personal income of all individuals
- (d) money value of final goods and services produced
Answer(d) money value of final goods and services produced
The same accounting idea one step earlier. That item fixes what the aggregate counts — the money value of final goods and services — and this one asks at which prices that money value is struck.
Which of the following statements is/are correct? 1. GDP deflator captures the average price of an unchanging basket of commodities that constitutes the GDP of the country. 2. GDP deflator can be used to measure the real GDP of the economy but not the inflation rate. Select the correct answer using the code given below.
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer(d) Neither 1 nor 2
The other end of the same pair. Once the real and nominal series are separated as they are here, the deflator is just their ratio — and that 2024 item turns on knowing that the deflator's basket changes with output and that it does measure inflation.
- practice — not a real PYQ
In a country that produces only bread, output was 100 units at Rs 10 each in the base year and 110 units at Rs 15 each in the current year. The GDP deflator for the current year is
- (a)100
- (b)110
- (c)150
- (d)165
Answer(c) 150 — nominal GDP is 110 x 15 = Rs 1,650 and real GDP at base-year prices is 110 x 10 = Rs 1,100, so the deflator is 1,650/1,100 = 1.5, or 150 in percentage terms.
- practice — not a real PYQ
The difference between actual real GDP and potential GDP in an economy is known as the
- (a)trade gap
- (b)output gap
- (c)savings gap
- (d)fiscal gap
Answer(b) output gap — potential GDP is the full-employment benchmark, and the shortfall or excess of actual output against it is the output gap.