How do you calculate real GDP using a GDP deflator?

• A. Nominal GDP ÷ (GDP deflator / 100)
• B. Nominal GDP × (GDP deflator / 100)
• C. Nominal GDP ÷ GDP deflator
• D. Nominal GDP ÷ (1 + GDP deflator / 100)

Answer: (A)

Verified step by step guidance

1. Understand the difference between nominal GDP and real GDP: Nominal GDP is measured using current prices, while real GDP is adjusted for changes in the price level to reflect the true quantity of goods and services produced.
2. Recognize that the GDP deflator is an index that measures the overall level of prices relative to a base year, typically expressed as a percentage (e.g., 110 means prices are 10% higher than the base year).
3. Recall the formula that relates nominal GDP, real GDP, and the GDP deflator: \(\text{GDP deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100\).
4. Rearrange the formula to solve for real GDP: \(\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{GDP deflator} / 100}\).
5. Apply this formula by dividing the nominal GDP by the GDP deflator expressed as a decimal (i.e., GDP deflator divided by 100) to calculate the real GDP.