If a country's nominal GDP increases by 5% between two years while its GDP deflator increases by 4%, the country's real GDP:
A) increases by 9%.
B) increases by 1%.
C) decreases by 1%.
D) decreases by 9%.

Question

Quizplus · Accepted Answer

Real GDP is calculated by dividing the nominal GDP by the GDP deflator and multiplying by 100. 
Real GDP = (Nominal GDP / GDP deflator) * 100
If nominal GDP increases by 5% and GDP deflator increases by 4%, then the real GDP increase can be calculated as: 
Real GDP = (Nominal GDP / GDP deflator)*100 = [(1+5/100)/(1+4/100)]*100
= (1.05/1.04)*100
= 100.9615
Therefore, the real GDP increases by 0.9615%, which can be rounded off to 1%.

If a Country's Nominal GDP Increases by 5% Between Two