Which of the following statements is true about real GDP?

• A. It measures the value of final goods and services produced using current-year prices, so it includes inflation.
• B. It equals nominal GDP only when the GDP deflator is greater than $100$.
• C. It measures the value of final goods and services produced using prices from a base year, so it adjusts for inflation.
• D. It measures the total value of intermediate goods and services produced within a country during a year.

Answer: (C)

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 year, but it uses prices from a base year rather than current-year prices. This allows it to adjust for inflation.
2. Step 2: Recognize the difference between nominal GDP and real GDP. Nominal GDP uses current-year prices and therefore includes the effects of inflation, while real GDP removes the inflation effect by using constant prices from a base year.
3. Step 3: Recall that the GDP deflator is an index that measures the level of prices of all new, domestically produced, final goods and services in an economy. Real GDP equals nominal GDP divided by the GDP deflator (expressed as a ratio), which adjusts for inflation.
4. Step 4: Note that real GDP only includes final goods and services, not intermediate goods, to avoid double counting in the measurement of economic output.
5. Step 5: Based on these points, identify the correct statement as the one that says real GDP measures the value of final goods and services produced using prices from a base year, so it adjusts for inflation.