Which statement correctly describes the relationship between nominal GDP and real GDP?

• A. Real GDP is nominal GDP adjusted for inflation (i.e., measured in constant prices).
• B. Nominal GDP is real GDP adjusted for inflation.
• C. Real GDP is nominal GDP adjusted for changes in population, not inflation.
• D. Nominal GDP and real GDP are always equal because both measure current output.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the definitions of nominal GDP and real GDP. Nominal GDP measures the value of all final goods and services produced within a country in a given period using current prices, without adjusting for inflation.
2. Step 2: Recognize that real GDP adjusts nominal GDP to remove the effects of inflation, allowing comparison of economic output across different time periods using constant prices.
3. Step 3: Recall the formula that relates nominal GDP, real GDP, and the GDP deflator (a measure of price level): \(\text{Nominal GDP} = \text{Real GDP} \times \text{GDP Deflator}\).
4. Step 4: From the formula, rearrange to express real GDP in terms of nominal GDP and the GDP deflator: \(\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{GDP Deflator}}\).
5. Step 5: Conclude that real GDP is nominal GDP adjusted for inflation (measured in constant prices), which means the correct statement is: 'Real GDP is nominal GDP adjusted for inflation.'