Which of the following statements about real GDP is true?

• A. Real GDP measures the value of final goods and services produced within a country, adjusted for changes in the price level.
• B. Real GDP is calculated using current market prices without adjusting for inflation.
• C. Real GDP always increases when nominal GDP increases.
• D. Real GDP includes the value of intermediate goods to avoid double counting.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the definition of Real GDP. Real GDP measures the value of all final goods and services produced within a country in a given period, adjusted for changes in the price level (inflation or deflation). This adjustment allows comparison of economic output across different years without the distortion caused by price changes.
2. Step 2: Recognize that Real GDP is not calculated using current market prices directly. Instead, it uses constant prices from a base year to remove the effects of inflation, unlike Nominal GDP which uses current prices.
3. Step 3: Analyze the relationship between Real GDP and Nominal GDP. While Nominal GDP can increase due to price increases alone, Real GDP only increases if there is an actual increase in the quantity of goods and services produced.
4. Step 4: Understand the treatment of intermediate goods. Real GDP includes only the value of final goods and services to avoid double counting, since intermediate goods are already included in the value of final goods.
5. Step 5: Based on these clarifications, identify the true statement: Real GDP measures the value of final goods and services produced within a country, adjusted for changes in the price level.