"Suppose a new computer is invented that costs one-quarter of existing computers and performs as well. Now, when GDP is calculated, production of the same number of computers creates only one-quarter as much dollar output - GDP falls!"[Fill in the blank]

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BlackTom AI · Accepted Answer

This question asks us to evaluate how a fall in the price of computers, while keeping output quantity the same, affects measured GDP.
Option a: 'true, both nominal and real GDP fall.' This is unlikely. If the new computers cost less but perform the same, the price level for those goods falls. Real GDP uses prices to value quantities of goods; if the quantity remains the same but prices fall, real GDP would not fall due to this technical change. In most standard treatments, a shift to cheaper but equivalent goods would not push real GDP down; it would either stay the same or rise if quantity or quality is properly accounted for.
Option b: 'false, real GDP should rise because of adjustments for quality.' This option captures an important point: when a new computer is cheaper but performs as well, the improvement in quality (or new production efficiency) is often treated as an increase in real GDP through the quality adjustment in price indices. If the same number of units is produced, the lower price would not automatically reduce real GDP; instead, if we account for the higher quality or better performance, real GDP can rise due to the improved output value embedded in a more capable product. This aligns with how quality-adjusted price indices (like hedonic adjustments) can show higher real output even when unit prices fall, since the underlying product is effectively more valuable.
Option c: 'false, real GDP should rise because of price index adjustments.' Price index adjustments alone help measure inflation or deflation but do not by themselves guarantee a rise in real GDP. Real GDP uses those price adjustments to remove the effect of price changes, but the statement here emphasizes a reason tied to quality improvements. While price index adjustments are relevant, saying they alone cause the rise abstracts away the mechanism of quality-driven value.
Option d: 'false, real GDP should be unchanged because of price index adjustments.' This contradicts the notion that a significant quality/efficiency improvement can be captured in real GDP. If the new computers deliver the same quantity of output at a lower price but with improved performance, and if the price index and measurement methods incorporate this quality improvement, real GDP may rise rather than remain unchanged. The blanket claim of no change ignores potential improvements in welfare or output value.
In summary, option b is the one that recognizes the effect of quality improvements and the role of quality-adjusted measurements in real GDP calculations, whereas the other options overlook or misattribute the impact of a cheaper yet equally capable new good on real GDP.

"Suppose a new computer is invented that costs one-quarter of existing computers and performs as well. Now, when GDP is calculated, production of the same number of computers creates only one-quarter as much dollar output - GDP falls!"[Fill in the blank]

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