Which statement best describes the difference between nominal GDP and real GDP?

• A. Nominal GDP is valued at current-year prices, while real GDP is adjusted for changes in the price level using constant (base-year) prices.
• B. Nominal GDP measures only government production, while real GDP measures only private-sector production.
• C. Nominal GDP excludes inflation, while real GDP includes inflation.
• D. Nominal GDP is adjusted for population growth, while real GDP is not.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the definition of nominal GDP. Nominal GDP is the total market value of all final goods and services produced within a country in a given period, measured using current-year prices. This means it reflects both changes in quantities produced and changes in prices (inflation or deflation).
2. Step 2: Understand the definition of real GDP. Real GDP measures the total market value of all final goods and services produced within a country, but it is adjusted for changes in the price level by using constant prices from a base year. This adjustment removes the effect of inflation or deflation, allowing comparison of output across different years.
3. Step 3: Compare nominal GDP and real GDP. Since nominal GDP uses current prices, it can increase either because of higher production or higher prices. Real GDP isolates changes in production by holding prices constant, so it reflects only changes in the quantity of goods and services produced.
4. Step 4: Evaluate the incorrect options. For example, nominal GDP does not measure only government production, nor does it exclude inflation; in fact, it includes inflation effects. Also, nominal GDP is not adjusted for population growth, and neither is real GDP inherently adjusted for population.
5. Step 5: Conclude that the best description is that nominal GDP is valued at current-year prices, while real GDP is adjusted for changes in the price level using constant (base-year) prices.