Multiple Choice
The United States of Barbeque produces two goods: Hot Dogs and Hamburgers. Use the following information to calculate the GDP Deflator for 2012, assuming the base year is 2010.
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10. Measuring National Output and Income
Nominal GDP and Real GDP
Multiple Choice
Which factor creates a problem when using money to value GDP, making it difficult to compare economic output across different years?
A
Fluctuations in population size
B
Variations in government spending
C
Differences in exchange rates
D
Changes in the price level due to inflation or deflation
Verified step by step guidance1
Understand that GDP measured in money terms (nominal GDP) reflects both changes in the quantity of goods and services produced and changes in the price level over time.
Recognize that inflation (a general increase in prices) or deflation (a general decrease in prices) affects the value of money, causing nominal GDP to rise or fall even if the actual output remains constant.
Identify that this price level change creates a problem when comparing GDP across different years because nominal GDP does not distinguish between changes in output and changes in prices.
Learn that to address this problem, economists use real GDP, which adjusts nominal GDP by removing the effects of price changes using a price index (such as the GDP deflator).
Conclude that the factor making it difficult to compare economic output across years using money values is the changes in the price level due to inflation or deflation.
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