Multiple Choice
In macroeconomics, why do economists generally avoid using nominal GDP alone when comparing output across different years?
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10. Measuring National Output and Income
Nominal GDP and Real GDP
Multiple Choice
Which of the following is true of real GDP?
A
Real GDP includes only the value of intermediate goods.
B
Real GDP is adjusted for changes in the price level over time.
C
Real GDP measures the value of output using current market prices.
D
Real GDP always increases when nominal GDP increases.
Verified step by step guidance1
Step 1: Understand the definition of Real GDP. Real GDP measures the value of all final goods and services produced within a country in a given period, adjusted for changes in the price level (inflation or deflation).
Step 2: Recognize that Real GDP excludes intermediate goods to avoid double counting, as only final goods and services are counted in GDP calculations.
Step 3: Note that Real GDP is calculated using constant prices from a base year, which means it is adjusted for changes in price levels over time, unlike Nominal GDP which uses current market prices.
Step 4: Understand that Real GDP does not necessarily always increase when Nominal GDP increases, because Nominal GDP can rise due to price increases (inflation) rather than an increase in actual output.
Step 5: Conclude that the true statement about Real GDP is that it is adjusted for changes in the price level over time, reflecting the real quantity of goods and services produced.
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