In macroeconomics, why do economists generally avoid using nominal GDP alone when comparing output across different years?

• A. Because nominal GDP counts only intermediate goods and ignores final goods, leading to double counting.
• B. Because nominal GDP excludes the value of government spending and therefore understates total production.
• C. Because nominal GDP reflects both changes in quantities produced and changes in the overall price level, so inflation can make GDP appear to rise even if real output does not.
• D. Because nominal GDP is adjusted for inflation and therefore cannot be used to measure changes in prices over time.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand what nominal GDP measures. Nominal GDP is the total market value of all final goods and services produced within a country in a given period, measured using current prices during the year of production.
2. Step 2: Recognize that nominal GDP includes changes in both the quantity of goods and services produced and the prices at which they are sold. This means nominal GDP can increase either because more goods are produced or because prices have risen (inflation).
3. Step 3: Identify the problem with using nominal GDP alone for comparisons across different years. Since nominal GDP is affected by price changes, it can give a misleading impression of economic growth if prices have increased due to inflation rather than an actual increase in output.
4. Step 4: Learn that economists prefer to use real GDP for comparisons over time. Real GDP adjusts nominal GDP by removing the effects of price changes, using constant prices from a base year, so it reflects only changes in the quantity of goods and services produced.
5. Step 5: Conclude that nominal GDP is avoided for cross-year comparisons because it conflates changes in output with changes in price levels, making it difficult to distinguish between real growth and inflation-driven increases.