An economy that trades freely with the rest of the world is ...

[sam.t96]

An economy that trades freely with the rest of the world is called a(n) ________ economy.
 
  A) command B) communist C) closed D) open

Question 2

Why is real GDP a more accurate measure of the level of production in an economy than nominal GDP? Explain with an example.
 
  What will be an ideal response?

[millet]

Answer to Question 1

D

Answer to Question 2

Consider an economy that produces only apples. If the price of apples in 2001 is 1 and the economy produces 10 apples, the nominal GDP of the economy is 10. Now, suppose in 2002, the price of apples doubles without any change in production. In this case, the nominal GDP of the economy in 2002 is 20. However, real GDP in both years is 10 if year 2001 is taken as the base year. So, according to real GDP, output has not changed between the two years. Hence, the real GDP, which accounts for inflation, is a more accurate measure of the level of production than nominal GDP.