Because GDP does not fully account for improvements in the quality of goods,
A) the inflation rate is understated and real GDP is overstated.
B) the inflation rate is overstated and real GDP is understated.
C) both the inflation rate and real GDP are overstated.
D) both the inflation rate and real GDP are understated.

Question

Quizplus · Accepted Answer

GDP does not fully account for improvements in the quality of goods, which means that the inflation rate is overstated, since it does not consider the fact that quality upgrades may justify higher prices for goods. This, in turn, means that real GDP is understated, since the inflation rate is artificially inflating the price level and making it appear that less output is being produced than is actually the case.

Because GDP Does Not Fully Account for Improvements in the Quality