Answer the following questions:

1. Explain the difference between nominal GDP, real GDP, and GDP per capita.

Nominal GDP shows the current GDP, while real GDP uses a deflator to show the effect of
inflation in the final result - real GDP also uses yearly base prices to adjust for inflation and is
calculated by taking the Nominal GDP divided by the GDP deflator, GDP per capita is the GDP
divided by the population, showing the value per capita. (person)

2. Suppose that production and prices rise from one year to the next, but population stays
constant. Will each of the three statistics above (in question no. 1) rise, fall or remain
unchanged? Explain your reasoning.

Nominal GDP will rise, as the overall value of production increases, real GDP can rise, stay the
same, or fall, according to inflation at the time. An example can be Venezuela, where the
production and prices increased one year but the inflation went infinitely up due to bad capital
handling, leading to a massive rise in Nominal GDP. Looking at data, we can see an almost
600% increase in the Nominal GDP but when using the value of the real GDP, we can see
inflation has taken better of the country, and the economy is actually suffering, however, if we go
not far to the United States, the same increase in production, and prices leads to an increase of
real GDP, as inflation is not higher than the increase, therefore the opposite result happens -
there is an increase in GDP. Comparing these two, one rises, one falls! We have to take into
account more factors to answer this with a specific example. GDP per capita will rise, as more
money is flown around the economy, being taken into account in the GDP calculation, the
population staying the same, while having more money will equal to the equation giving more
value to the GDP per capita.

3. In what type of situation is GDP per capita more appropriate than nominal or real GDP?

GDP per capita is a much better indicator for the living standards of an individual, rather than
nominal GDP, or real GDP. For example, when discussing, comparing or determining the
average living standard, GDP per capita will be more useful. This becomes even more directly
useful when comparing between countries - one nation can have a lower population and the
same GDP as another, and the GDP per capita value would tell us that the nation with the lower
population than another but the same GDP is better off. In this case, GDP per capita will be
much higher in the less populated country than in the more populated one.

4. Is GDP an under- or overestimate? Explain your answer.

GDP underestimates the total value due to not taking into account certain values, such as
second-hand purchases, stocks, and other things. There is more money flowing in the economy
than can be measured by the equation.