Chapter 11, Problem 2MCQ

To determine

The question requires us to determine the factor which is the best measurement for comparing aggregate output in a country over time.

Explanation of Solution

The aggregate output represents the overall production of goods and services in an economy in a given period. Real GDP is the best measurement for comparing the aggregate output in a country over time because it gives the inflation-adjusted value of the estimation.

Real GDP is the value of GDP calculated at the base year prices. It is the inflation-adjusted value of all final goods and services in a given year in an economy.

For example, suppose the GDP growth rate (using nominal GDP) is 4% per annum while the rate of inflation in the economy is 3% per annum. Here, the real growth would be 1%, but using the nominal value gives the exaggerated value of the growth. Though, real GDP doesn’t say anything about the welfare of the nation.

Thus, option “b” is correct.

The other options are incorrect because:

• The nominal GDP is calculated by using the current year's prices as it doesn’t adjust for inflation. Nominal GDP gives the exaggerated value of growth.
• GDP per capita gives the average level of GDP per individual in an economy. It doesn’t say anything about the distribution of income and output in a nation.