Real GDP is:
Group of answer choices
A GDP adjusted for standard of living Nominal
B GDP adjusted for population Nominal
C GDP adjusted for inflation
D GDP adjusted for changes in output
The correct answer and explanation is:
The correct answer is C: GDP adjusted for inflation.
Real GDP refers to the Gross Domestic Product (GDP) that is adjusted for inflation. Inflation can distort the true value of economic output over time, so real GDP is used to compare the value of goods and services produced across different years without the impact of price changes. It is calculated by using constant prices from a base year, which allows for more accurate comparisons between periods.
Nominal GDP, on the other hand, measures the value of goods and services produced in an economy at current prices, without adjusting for inflation. This means that if prices rise due to inflation, nominal GDP may give a false impression of economic growth, as it reflects both the actual increase in output and the increase in prices.
Real GDP is a more useful indicator when comparing the economic performance of a country over time because it isolates changes in the volume of goods and services produced. By adjusting for inflation, real GDP provides a clearer picture of whether the economy is truly growing in terms of production or whether any apparent growth is simply due to price increases.
For example, if nominal GDP increases by 5% in a given year, but inflation is also 5%, the real GDP growth would be zero. This means that there was no actual increase in the quantity of goods and services produced; the increase in GDP was solely due to higher prices.
Overall, real GDP is a crucial tool for policymakers and economists to assess the real growth of an economy, as it accounts for changes in price levels, providing a more accurate understanding of economic performance.