Suppose a small economy produces only smart TVs. In year one, 100,000 TVs are produced and sold at a price of $1,200 each. In year two, 100,000 TVs are produced and sold at a price of $1,000
Each. As a result,
A) nominal GDP stays constant, while real GDP decreases.
B) nominal GDP decreases, while real GDP stays constant.
C) nominal GDP and real GDP both decrease.
D) nominal GDP decreases, and real GDP decreases even more.

Question

Quizplus · Accepted Answer

Nominal GDP is calculated by multiplying the current year's output by the current year's prices. In year one, the nominal GDP is 100,000 TVs * $1,200 = $120,000,000. In year two, it is 100,000 TVs * $1,000 = $100,000,000, showing a decrease in nominal GDP. Real GDP, however, measures the output at constant prices, so if year one is the base year, real GDP remains the same in both years since the quantity of TVs produced and sold did not change.

Suppose a Small Economy Produces Only Smart TVs