Question

Which of the following is the correct way to calculate real GDP?

a.
Divide constant GDP by the implicit GDP price deflator and then multiply by 100.
b.
Divide current GDP by the implicit GDP price deflator and then multiply by 100.
c.
Multiply current GDP by the implicit GDP price deflator.
d.
Multiply constant GDP by the implicit GDP price deflator.

Answer 1

Answer: b. Divide current GDP by the implicit GDP price deflator and then multiply by 100.

Step-by-step explanation:

The Real GDP is preferred when it comes to measuring economic growth because it measures GDP independently of inflation unlike the Nominal GDP which is inflated by the higher prices brought upon by inflation.

To deflate the Nominal GDP to a Real one, there are several methods and one of them is to divide the Nominal GDP by a price deflator and then multiplying the result by 100. The result will show if indeed the economy has grown without the bothersome effect of inflation.