Suppose the nominal GDP for year A is $500,000 and the nominal GDP for the same economy in year B is $400,000. The real GDP for year A is $500,000, and the real GDP for year B is $500,000. The same amount of goods and services were produced each year. What happened to the prices of goods and services between year A and year B? Explain

It should be understood that the nominal GDP is the total value of all goods and services produced in a given time period, usually quarterly or annually with inflation, while that of Real GDP is the inflation-corrected value of goods.

This means that the inflation during year B is higher than that of year A and that's why the nominal GDP of year B is a bit lower than that of year A.

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anthougo anthougo · Answer 2 · 2021-12-03T17:04:23+01:00

The cause of the difference in the prices of goods and services between year A and year B using the nominal GDP is inflation, which was higher in year A than in year B.

The nominal GDP, which does not eliminate inflation, and the real GDP, which eliminates inflation, for year B would be the same figures with year A's, without inflation. In both years, equal quantities of goods and services were produced.

Data:

Nominal GDP for year A = $500,000

Nominal GDP for year B = $400,000

Real GDP for year A = $500,000

Real GDP for year B = $500,000

Thus, removing the effect of inflation changes the nominal GDP into the real GDP.

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