-Refer to Figure 5.1. If the GDP deflator has a base year value of P = 1.0 then the following are correct except:
A) real GDP in the year 2006 is 0Y.
B) nominal GDP in the year 2006 is the area 0Y x 0P.
C) nominal and real GDP will be the same in every year.
D) the GDP deflator in the year 2007 is 0P.

Question

-Refer to Figure 5.1. If the GDP deflator has a base year value of P = 1.0 then the following are correct except:
A) real GDP in the year 2006 is 0Y. 
B) nominal GDP in the year 2006 is the area 0Y x 0P. 
C) nominal and real GDP will be the same in every year. 
D) the GDP deflator in the year 2007 is 0P.

Quizplus · Accepted Answer

The GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. Real GDP is calculated by dividing nominal GDP by the GDP deflator, adjusting for inflation. Therefore, nominal and real GDP will only be the same in the base year when the GDP deflator is set to 1.0. In other years, as prices change, the nominal and real GDP will differ unless there is no inflation or deflation, which is unlikely over multiple years.