Which statement best describes how real GDP differs from nominal GDP?

• A. Real GDP is measured using current prices, while nominal GDP is adjusted for changes in the price level.
• B. Real GDP is adjusted for changes in the price level (inflation/deflation), while nominal GDP is measured using current prices.
• C. Real GDP includes only domestically produced goods and services, while nominal GDP includes both domestic and foreign production.
• D. Real GDP measures the value of intermediate goods, while nominal GDP measures only final goods and services.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definitions of nominal GDP and real 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 prices during the time of production.
2. Step 2: Recognize that real GDP adjusts nominal GDP to account for changes in the price level (inflation or deflation), allowing comparison of economic output across different time periods without the distortion caused by price changes.
3. Step 3: Recall that nominal GDP can increase either because of an increase in production or because of rising prices, whereas real GDP increases only if there is an increase in actual production of goods and services.
4. Step 4: Note that both nominal and real GDP include only domestically produced final goods and services; foreign production is excluded in both measures.
5. Step 5: Understand that GDP measures final goods and services only, not intermediate goods, to avoid double counting; this applies to both nominal and real GDP.