If real GDP rises and nominal GNP falls which of the followi

If real GDP rises and nominal GNP falls, which of the following must be true?

1) Both the price level has decreased and production in the country by foreign firms has grown faster than has production outside of the country by domestic firms.

2) Production in the country by goreign firms has grown faster than has production outside of the country by domestic firms.

3) Either the price level has decreased or production in the country by foreign firms has grown faster than has production outside of the country by domestic firms, but possibly both of those choices.

4) Either the price level has decreased or production in the country by foreign firms has grown faster than has production outside of the country by domestic firms, but not both choices.

5) The price level has decreased

Solution

Real GDP is calculated taking into account base year’s prices while nominal GNP is calculated taking into account current year’s prices.

Apart from this, nominal GNP also includes net factor income from abroad.

Thus, there are two scenarios in which real GDP can rise while nominal GDP falls –

1. If price level decreases in current year with respect to previous year. In such case real GDP can rise as it calculated on basis on base year prices while nominal GNP can fall as it is based on current year’s price.

2. If production by foreign firms with in country has grown faster than production outside the country by domestic firms then in such case net factor income from abroad will be negative and this can result in fall in nominal GNP while real GDP (which does not include NFIA) may rise.

So, either the price level has decreased or production in the country by foreign firms has grown faster than has production outside of the country by domestic firms, but possibly both of those choices.

Hence, the correct answer is option (3).