Question

Statistics

Posted 6 months ago

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What is one potential problem that may result from calculating real GDP using constant prices of products in a base year?
Choose 1 answer:
A When the prices of some goods fall over time, calculating their value in constant prices makes these goods seem like a larger share of GDP than they really are
(B) When prices decrease and output decreases over time, real GDP will decrease as well
(c) When prices do not change over time, the real GDP will not change either
(D) When prices of all goods rise over time, calculating their value in constant prices can understate how much real output increased between years
(E) When the prices of all goods decrease over time, calculating the value of output in constant prices can overstate how much real output increased between years
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Answer from Sia

Posted 6 months ago

Solution by Steps

step 1

Identify the potential problems with using constant prices from a base year to calculate real GDP

step 2

Understand that real GDP is meant to reflect the true value of goods and services produced, eliminating the effects of price changes over time

step 3

Recognize that using constant prices can distort the share of GDP represented by goods whose prices have changed significantly since the base year

step 4

Evaluate the given options in the context of the potential problems identified in steps 1-3

Answer

D

Key Concept

Real GDP calculation using constant prices

Explanation

Calculating real GDP using constant prices can understate the true increase in real output if all prices rise over time, because it does not reflect the increase in value that results from higher prices.

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