Suppose next year the two firms produce and sell exactly the same qua…

An economy has only two firms, A and B. The following information is given. All purchases by one firm from the other are used up as raw materials.

Items	Amount (in lacs)
1. Exports by firm A	20
2. Imports of raw materials by firm A	50
3. Sales to households by firm A	90
4. Sales to firm B by firm A	40
5. Sales to firm A by firm B	30
6. Sales to households by firm B	60

Answer the question on the basis of the above information.

Suppose next year the two firms produce and sell exactly the same quantities as this year, but every price doubles. Taking this year as the base year, which of the following is correct for next year?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Nominal GDP doubles, but real GDP stays the same.

Nominal GDP uses current prices, so doubling every price doubles it. Real GDP uses base-year prices, so with the same output it stays the same.

Option (1) Real GDP doubles, but nominal GDP stays the same. — Incorrect. Real GDP changes only with output, and output is unchanged.

Option (2) Both nominal GDP and real GDP stay the same. — Incorrect. Nominal GDP is valued at current prices, which have doubled.

Option (3) Both nominal GDP and real GDP double. — Incorrect. Real GDP stays at base-year prices; it cannot double without more output.

Option (4) Nominal GDP doubles, but real GDP stays the same. — Correct. Prices double, output does not, so only nominal GDP doubles.

NCERT (2026-27): “2.4 Nominal and Real GDP … If we measure the GDP of a country in two consecutive years and see that the figure for GDP of the latter year is twice that of the previous year, we may conclude that the volume of production of the country has doubled. But it is possible that only prices of all goods and services have doubled between the two years whereas the production has remained constant. Therefore, in order to compare the GDP figures (and other macroeconomic variables) of different countries or to compare the GDP figures of the same country at different points of time, we cannot rely on GDPs evaluated at current market prices. For comparison we take the help of real GDP. Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or constant prices). Since these prices remain fixed, if the Real GDP changes we can be sure that it is the volume of production which is undergoing changes. …”