Question

Which of the following best describes the distinction between real GDP and nominal GDP?

• A. Nominal GDP is calculated by deflating real GDP; real GDP is unadjusted for inflation
• B. Nominal GDP includes intermediate goods; real GDP excludes intermediate goods
• C. Nominal GDP uses current prices; real GDP uses constant prices
• D. Nominal GDP is calculated every year; real GDP is calculated only occasionally

Answer 1

The correct option is C

Nominal GDP uses current prices; real GDP uses constant prices

Nominal GDP will increase when prices increase, even if output doesn't change at all. Using constant prices allows GDP to reflect actual changes in production instead of changes in prices.