Which one of the following statements is not correct ?

[amp_mcq option1=”Real GDP is calculated by valuing outputs of different years at common prices.” option2=”Potential GDP is the real GDP that the economy would produce if its resources were fully employed.” option3=”Nominal GDP is calculated by valuing outputs of different years at constant prices.” option4=”Real GDP per capita is the ratio of real GDP divided by population.” correct=”option3″]

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UPSC CDS-1 – 2021

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Statement C is not correct. Nominal GDP is calculated by valuing the output of goods and services at current market prices for each year. Real GDP, on the other hand, is calculated by valuing the output at the prices of a base year (constant prices) to remove the effect of inflation and reflect changes in the actual volume of production.

– Real GDP uses constant prices (base year prices) to measure production growth.
– Nominal GDP uses current prices, which include the effects of both production changes and price changes (inflation/deflation).
– Potential GDP represents the maximum sustainable output an economy can produce.
– Real GDP per capita indicates the average standard of living or economic productivity per person.

The distinction between nominal and real GDP is crucial for accurately assessing economic performance over time. Comparing nominal GDP across years can be misleading if there has been significant inflation, whereas real GDP provides a more reliable measure of economic growth.

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