Which statement best distinguishes nominal GDP from real GDP?

• A. Nominal GDP is adjusted for inflation, while real GDP is measured using current-year prices.
• B. Nominal GDP is measured using current-year prices, while real GDP is adjusted for changes in the price level (inflation) using constant prices from a base year.
• C. Nominal GDP includes only final goods and services, while real GDP includes both intermediate and final goods and services.
• D. Nominal GDP excludes government spending, while real GDP includes government spending.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definitions of nominal GDP and real GDP. Nominal GDP measures the value of all final goods and services produced within a country using current-year prices, without adjusting for inflation.
2. Step 2: Recognize that real GDP adjusts for changes in the price level by using constant prices from a base year. This adjustment allows real GDP to reflect the true growth in output by removing the effects of inflation.
3. Step 3: Compare the two concepts: nominal GDP can increase either because of higher production or higher prices, while real GDP increases only if there is an increase in actual production.
4. Step 4: Eliminate incorrect statements by checking their accuracy: nominal GDP does not exclude government spending, and both nominal and real GDP include only final goods and services, not intermediate goods.
5. Step 5: Conclude that the best distinguishing statement is that nominal GDP is measured using current-year prices, while real GDP is adjusted for inflation using constant base-year prices.