Which of the following is the correct calculation of real gross domestic product (GDP)?

• A. Nominal GDP multiplied by the GDP deflator, divided by 100
• B. Nominal GDP minus the GDP deflator
• C. Nominal GDP plus the GDP deflator
• D. Nominal GDP divided by the GDP deflator, multiplied by 100

Answer: (D)

Verified step by step guidance

1. Understand that nominal GDP measures the value of all final goods and services produced within a country at current prices, without adjusting for inflation.
2. Recognize that the GDP deflator is an index that reflects the level of prices of all new, domestically produced, final goods and services in an economy, relative to a base year, and is used to adjust nominal GDP to account for inflation.
3. Recall the formula to calculate real GDP, which adjusts nominal GDP by removing the effects of price changes, is given by: \( \text{Real GDP} = \frac{\text{Nominal GDP}}{\text{GDP Deflator}} \times 100 \)
4. Note that dividing nominal GDP by the GDP deflator (expressed as an index number) and then multiplying by 100 converts the nominal GDP into real GDP, reflecting the actual quantity of goods and services produced.
5. Conclude that the correct calculation of real GDP is to divide nominal GDP by the GDP deflator and multiply by 100, not to multiply nominal GDP by the GDP deflator or add/subtract the deflator.