In 2012, the nominal GDP was $700B with a price index of 110. Thus, the real GDP of this year was $700B/110 × 100 = $636B. In turn, in 2013, the nominal GDP was $850B with a price index of 140. Thus, the real GDP of this year was $850B/140 × 100 = $607B. On the basis of the results, it is possible to conclude that the real GDP decreased in 2013 in comparison with 2012. In general, GDP as “the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period” demonstrates the economic growth or its absence (Fernando, 2022, para. 1). However, while the nominal GDP is measured by current prices unadjusted for inflation, it does not affect the real GDP as prices are determined by the money supply that may change independently.
In turn, the real GDP refers to output in constant currency for an accurate comparison of the economic output between years. Increased price index in 2013 indicates price changes, and rising prices inflate GDP. However, inflation is one of the reasons why the real GDP decreases, and this tendency is supported by 2012-2013 changes. In general, the real GDP may decrease due to multiple factors that include increasing interest rates, the reductions of government spending, shift in demand, unemployment, falling real wages, and inflation. This tendency may lead to the negative consequences for a country’s economic growth as a decreasing real GDP directly impacts spending patterns and lead to changes in customer purchasing power. In turn, the inability of customers to buy products and services causes challenges for businesses that support the state’s economic well-being. In addition, businesses’ failure leads to unemployment and cutting wages that contribute to the decrease of the real GDP as well.
Reference
Fernando, J. (2022). Gross domestic product (GDP). Investopedia. Web.