Suppose a small economy produces only MP3 players. In year 1, 10,000 MP3 players are produce and sold at a price of $100 each. In year 2, 12,000 MP3 players are produced and sold at a price of $80 each. Which of the following statements is true?
A) Real GDP and nominal GDP both increase
B) Real GDP increases while nominal GDP remains constant
C) Real GDP decreases while nominal GDP increases
D) Real GDP increases while nominal GDP decreases

Question

Quizplus · Accepted Answer

Real GDP is a measure of a country's economic output adjusted for inflation, while nominal GDP is the total value of goods and services produced in an economy without adjusting for inflation. In this case, the decrease in the price of MP3 players between year 1 and 2 indicates that there has been a decrease in the overall price level – this means that inflation has fallen. Therefore, the increase in the production of MP3 players from 10,000 to 12,000 between year 1 and 2 led to an increase in real GDP. However, the decrease in the price of MP3 players from $100 to $80 led to a decrease in nominal GDP, despite the increase in the quantity of MP3 players produced and sold. Therefore, the correct answer is D) Real GDP increases while nominal GDP decreases.

Suppose a Small Economy Produces Only MP3 Players