Which statement best defines real GDP?

• A. The value of final goods and services produced within a country in a given period, measured using constant (base-year) prices to remove the effects of inflation.
• B. The total market value of all intermediate and final goods produced within a country in a given period, measured at base-year prices.
• C. The total income earned by households after taxes and transfers, adjusted for inflation.
• D. The value of final goods and services produced within a country in a given period, measured using current-year prices.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand that Real GDP measures the value of final goods and services produced within a country during a specific period, but it adjusts for changes in price level (inflation or deflation) to reflect true economic growth.
2. Step 2: Recognize that Real GDP uses constant or base-year prices to eliminate the effects of inflation, allowing comparison of economic output across different years without price distortions.
3. Step 3: Differentiate Real GDP from Nominal GDP, where Nominal GDP is measured using current-year prices and can be influenced by changes in price levels, while Real GDP holds prices constant.
4. Step 4: Note that Real GDP only includes final goods and services to avoid double counting, excluding intermediate goods which are used in the production of final goods.
5. Step 5: Conclude that the best definition of Real GDP is: 'The value of final goods and services produced within a country in a given period, measured using constant (base-year) prices to remove the effects of inflation.'