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

• A. Nominal GDP adjusts for inflation using base-year prices, while real GDP is measured using current-year prices.
• B. Nominal GDP is always larger than real GDP because it measures output in physical quantities rather than prices.
• C. Nominal GDP includes only domestically produced intermediate goods, while real GDP includes only final goods and services.
• D. Nominal GDP is measured using current-year prices, while real GDP is adjusted for changes in the overall price level (inflation/deflation) using constant (base-year) prices.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand that Nominal GDP measures the value of all final goods and services produced within a country in a given year using the prices that prevail in that same year (current-year prices).
2. Step 2: Recognize that Real GDP adjusts Nominal GDP to remove the effects of inflation or deflation by valuing output using constant prices from a base year, allowing for comparison of economic output across different years.
3. Step 3: Note that the key difference lies in price measurement: Nominal GDP uses current prices, while Real GDP uses base-year prices to reflect true changes in quantity produced rather than price changes.
4. Step 4: Understand that this adjustment in Real GDP helps economists and policymakers analyze economic growth more accurately by isolating changes in production from changes in price levels.
5. Step 5: Conclude that the correct description is that Nominal GDP is measured using current-year prices, whereas Real GDP is adjusted for changes in the overall price level using constant (base-year) prices.