How does price levels affect GDP?
Hi, I'm trying to answer this question in Econ.
There's a given price level for a year. however, for that year, there was a price ceiling. The actual price level for that year is actually 20% more then what was given. How does this affect the GDP? Does it make it higher, lower, or the same?
The book's answer says it would be lower. However I'm a little confused why this is the answer. If the price levels were supposed to be higher, wouldn't that lead to a higher GDP? Since the prices would be higher adding more to the gdp?
Idk, there's a lot I feel that you have to consider which is probably why I'm getting confused. Any help is appreciated.
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Well the only sort of logic I could make from this is (assuming by actual price you mean equilibrium price)
A price ceiling if lower than equilibrium price will cause a shortage in the demand in a market. Therefore this would cause demand to exceed supply. If this is the case it means that the amount produced in the market is less than it would be at equilbirum price therefore because there was no actual sales made at the 20% more price. If sales had been made at that price it is possible GDP would rise. But because of the ceiling that caused the decrease in supply and the market been forced to remain at a lower price this would cause GDP to fall.
GDP is given in simple terms by GDP = PL * Y where Y is the output of an economy. If all other factors remain the same (e.g. only this markets supply changes) then we would expect a fall in GDP because the output in the economy has fallen.