If real GDP is less then Nominal GDP is that caused by inflation or deflation?

Question

If real GDP is less then Nominal GDP is that caused by inflation or deflation?

Answer 1

inflation.

suppose an economy produces 10 things this year valued at $10. the real and nominal output this year is $100.

Suppose that Next year the economy produces the same 10 things, but the money supply INCREASES by 10% (i.e. the inflation rate is +10%), which results in the value to increase to $11. Now, the nominal output is $110, but the real output is still $100.

So, Nominal > Real when there exists inflation.

Answer 2

Real GDP is Nominal GDP Discounted by Inflation, therefore, if there is Inflation Real GDP is Less than Nominal (it has less Purchasing power) and if there is Deflation, Real GDP is greater than Nominal GDP.

Answer 3

The cause of Real GDP being less then Nominal GDP is  c inflation. Let us say Real GDP was 200 last year and Nominal GDP was also 200. This Year Real GDP is 300 but nominal GDP is 400.. So Nominal GDP increase by 100% but Real Gdp has increased by 50% only. So how could nominal GDP increase by 100%? The extra 50% increase in Nominal GDP is due to increse in prices of goods and services, ie. due to inflation.

Real GDP= Nominal GDP / GDP Price Deflator.

So, If prices remain the same, GDP Price Deflator =1, which means Real GDP and Nominal GDP are equal

If prices have risen, GDP Price Deflator is greater than 1 and hence Real GDP is less than Nominal GDP.

If prices have fallen, GDP Price Deflator is less than 1 and hence Real GDP is higher than Nominal GDP.

But strictlt speaking, the question' answer is : can't say. Take this example, Real GDP was 200 in both last year and this year. The Nominal GDP was 3.00 in both last year and This year. So , in both the years Real GDOP was less than Nominal GDP. It means that there inflation as compared to the price level in the base year. But there was neither inflation nor deflation betwwn the last year and this year, that is why both real GDP has remained the same for both the years.

Sometimes, questions are not framed strictly in accordance with the intention of the questioner.