Final answer:
Nominal GDP is influenced by changes in the price level, meaning it changes when there is a change in either output or the price level. To measure the actual level of output, economists adjust the nominal GDP for changes in the price level, giving us real GDP.
Step-by-step explanation:
Nominal GDP and its Relationship to Inflation
Nominal gross domestic product (GDP) is a measurement of a nation's output of goods and services expressed in dollar terms. It is important to note that nominal GDP is influenced by changes in the price level. When there is inflation and prices rise, the nominal GDP figure will increase, even if the actual level of output remains the same. Hence, nominal GDP can change when there is a change in either output or the price level.
Real GDP and Adjusting for Inflation
To obtain a more accurate measurement of the actual level of output in a nation, economists adjust the nominal GDP for changes in the price level. This adjusted measure is referred to as real GDP. By extracting the increase in prices from the nominal GDP, we can isolate changes in output and account for the impact of inflation.