In macroeconomics, how is real GDP different from nominal GDP?

• A. Real GDP measures the quantity of money in the economy, while nominal GDP measures total government spending.
• B. Real GDP includes only intermediate goods, while nominal GDP includes only final goods.
• C. Real GDP uses current-year prices, while nominal GDP uses constant base-year prices.
• D. Real GDP adjusts output for changes in the price level (inflation/deflation), while nominal GDP values output at current-year prices.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand that GDP (Gross Domestic Product) measures the total value of all final goods and services produced within a country during a specific period.
2. Step 2: Recognize that nominal GDP calculates this value using current-year prices, meaning it reflects both changes in quantities produced and changes in prices (inflation or deflation).
3. Step 3: Realize that real GDP adjusts for changes in the price level by using constant base-year prices, which allows us to isolate changes in the quantity of goods and services produced from changes in prices.
4. Step 4: Note that because real GDP removes the effect of price changes, it is a better measure for comparing economic output over different time periods.
5. Step 5: Summarize that the key difference is nominal GDP values output at current prices, while real GDP values output at constant prices to account for inflation or deflation.