If GNP is 16% higher than the last year and the rate of inflation is 9%, production in the economy has grown by:
Show answer & explanation
Correct answer: D
Explanation
The correct answer is option 4 i.e. 7%.
To determine the real growth in production, we use the formula:
Real Growth Rate = Nominal Growth Rate - Inflation Rate
Here, the Nominal Growth Rate (GNP increase) is 16%, and the Inflation Rate is 9%.
Thus,
Real Growth Rate = 16% - 9% = 7%
This means the actual increase in production, after adjusting for inflation, is 7%. The economy’s output has grown in real terms by 7%, reflecting an increase in goods and services produced rather than just a rise in prices.