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16 August, 07:36

Nominal GDP is less than real GDP in an economy in both year 1 and year 2. In year 3, nominal GDP is equal to real GDP. In year 4, nominal GDP is slightly greater than real GDP. In year 5, nominal GDP is significantly greater than real GDP. Which year is the base year being used to calculate the price index for this economy?

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  1. 16 August, 11:02
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    Year 3 is likely to having been used as base year.

    Explanation:

    Nominal GDP is the value of goods & services (valued at current prices), produced by an economy during a given period of time.

    Real GDP is the value of goods & services (valued at current prices), produced by an economy during a given period of time.

    Nominal GDP can change due to both - change in price, change in production quantity. However, Real GDP changes only due to change in production quantity.

    Nominal GDP > Real GDP, when current year price level > base year price level. Nominal GDP < Real GDP, when current year price level < base year price level. Nominal GDP = Real GDP, when current year price level = base year price level or current year is the base year.

    So, Year 3 is likely to having been used as base year.
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