Statement I: A GDP deflator of 1.5 means that prices in the current year are 1.5 times the prices in the base year.
Statement II: In an economy producing only bread, the ratio of nominal GDP to real GDP of a year changes when only the quantity of bread produced in that year changes.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Statement I is true but Statement II is false.
Statement I: A GDP deflator of 1.5 means that prices in the current year are 1.5 times the prices in the base year. — True. A deflator of 1.5 means current prices are 1.5 times base-year prices.
Statement II: In an economy producing only bread, the ratio of nominal GDP to real GDP of a year changes when only the quantity of bread produced in that year changes. — False. The volume of production is fixed in both measures, so the ratio moves only with prices.
NCERT (2026-27): “2.4 Nominal and Real GDP … Notice that the ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the real GDP) to the current year. In the calculation of real and nominal GDP of the current year, the volume of production is fixed. Therefore, if these measures differ it is only due to change in the price level between the base year and the current year. The ratio of nominal to real GDP is a well known index of prices. This is called GDP Deflator. Thus if GDP stands for nominal GDP and gdp stands for real GDP then, GDP deflator = GDP gdp . Sometimes the deflator is also denoted in percentage terms. In such a case deflator = GDP gdp × 100 per cent. In the previous example, the GDP deflator is 1,650 1,100 = 1.50 (in percentage terms this is 150 per cent). This implies that the price of bread produced in 2001 was 1.5 times the price in 2000. Which is true because price of bread has indeed gone up from Rs 10 to Rs 15. …” |