In the year 2011 the prices at which producers sold their ou

In the year 2011 the prices at which producers sold their output were quite real to those producers. If they had tried to sell their products at 1983 prices their customers and stockholders would have rightly thought the producers had lost touch with reality. Why, then, would an economist calculate the value of 2011 output at 1983 prices and call it “real\" GDP?

Solution

Answer - An economist would call the value of output produced in 2011 at the price level of 1983 a \"real\" GDP because it shows the value of output produced at constant prices. It does not includes the inflation index while calculating the value of GDP for the year 2011. In case, they will calculate the value of output produced at 2011 price level, then it will not show the real picture of the actual output produced in the economy as the total value of output or the GDP will be inflated value as it does not factor out the inflationary impact of the price level from 1983 till 2011. The loss in touch with reality here means the updated value of quantity produced at the current price level will not be shown at the 18 years old price level.