Final answer:
False. The statement about GDP using both current prices and prices adjusted for inflation is false. Nominal GDP uses current prices, whereas real GDP adjusts for inflation to provide an accurate measure of a nation's economic output. The correct option is b.
Step-by-step explanation:
The statement 'GDP uses current prices. GDP uses prices adjusted for inflation.' is b) False. Gross Domestic Product (GDP) is measured in two distinct ways: as nominal GDP and as real GDP. Nominal GDP is calculated using the current prices at the time of measurement, capturing the value of goods and services produced within a country.
However, this does not take inflation or deflation into account, and thus can be misleading when comparing economic output over time. To address this issue, economists use real GDP, which is nominal GDP adjusted for changes in the price level, factoring in inflation or deflation.
Real GDP provides a more accurate reflection of a nation's actual output by isolating the quantity of goods and services produced from changes in their prices. This adjustment is achieved using a price index, such as the GDP deflator.
For instance, after accounting for inflation, we might realize that a significant portion of the growth in nominal GDP over time is simply due to rising prices rather than an actual increase in production. By contrast, when we look at real GDP, we see the genuine growth in the production of goods and services.
Economists often use a method that divides nominal GDP by a price index (adjusted to a base year level of 100) to convert from nominal to real GDP and strip out the effects of inflation, thus arriving at a more substantive representation of economic growth. The correct option is b.