Question

Define real GDP and discuss the relationship between real GDP and the quantity of labor.

Answer 1

Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices, and is often referred to as "constant-price," "inflation-corrected" GDP, or "constant dollar GDP." Unlike nominal GDP, real GDP accounts for changes in price levels and provides a more accurate figure of economic growth. Real GDP, therefore, provides a better basis than nominal GDP for assessing long-term national economic results. True GDP represents GDP on a quantity-based basis using a GDP deflator. Without real GDP, it would be hard to tell from nominal GDP if demand is actually expanding, or just a variable in the economy's rising per-unit prices.

The role of output is the relationship between real GDP and the amount of work working, other items remaining the same.
An additional hour of work means less leisure time, therefore the function of production is the mirror image of the leisure time real GDP PPF The demand for labor depends on the marginal product of labor, which is the additional real GDP produced by an additional hour of labor if all other production influences remain the same.
The marginal product of labor is regulated by the principle of declining returns, which states that the marginal product of labor decreases as the quantity of labor increases, but the quantity of capital and technology remains the same.