Which of the following data do economists primarily use to calculate the real GDP of a nation?

• A. Nominal GDP and a price index to adjust for inflation
• B. Exchange rates and foreign investment flows
• C. Unemployment rate and labor force participation
• D. Total government spending and tax revenues

Answer: (A)

Verified step by step guidance

1. Step 1: Understand that Real GDP measures the value of all final goods and services produced within a country, adjusted for changes in the price level (inflation or deflation). This adjustment allows comparison of economic output across different time periods without the distortion caused by price changes.
2. Step 2: Recognize that Nominal GDP is the market value of goods and services produced in a country, measured using current prices during the time period being analyzed. However, Nominal GDP does not account for inflation.
3. Step 3: Identify that to calculate Real GDP, economists use Nominal GDP and adjust it by a price index, such as the GDP deflator or Consumer Price Index (CPI), which reflects changes in the overall price level.
4. Step 4: The formula to calculate Real GDP is: \[ Real\ GDP = \frac{Nominal\ GDP}{Price\ Index} \times 100 \] where the Price Index is typically expressed as an index number (e.g., 100 in the base year).
5. Step 5: Conclude that other data such as exchange rates, foreign investment flows, unemployment rate, labor force participation, government spending, and tax revenues are important economic indicators but are not directly used to calculate Real GDP.