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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 10.4, Problem 4QQ
Textbook Problem
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Define real GDP and nominal GDP. Which is a better measure of economic well-being? Why?

To determine
The difference between real GDP and nominal GDP.

Explanation of Solution

The GDP is the summation of the monetary value of all the goods and services produced within the political boundary of a country, within a financial year. There are two different ways of calculating the GDP of the economy and they are the real GDP and the nominal GDP.

The real GDP is the GDP calculated at the constant prices. There will be a base price index and the value of goods and services will be calculated on the base of the constant prices. Thus, it will measure the GDP of the economy on the same base year price index, which will help us to identify the inflation in the economy. The nominal GDP is the GDP calculated at the current prices. The GDP will be calculated by multiplying the quantity of goods and services produced with the current year’s market prices, which will include the inflation impact...

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