Question

The difference between real GDP and nominal GDP is primarily due to:

a) The prices used in their calculations.
b) Real GDP including the depreciation of capital.
c) Nominal GDP including net exports of goods and services.
d) The indirect taxes used in their calculations.

Answer 1

The difference between real GDP and nominal GDP is that the former is adjusted for inflation using a price index like the GDP deflator, while the latter is not.

Step-by-step explanation:

The difference between real GDP and nominal GDP is primarily due to the prices used in their calculations. Nominal GDP measures a country's economic output using current prices, without adjusting for inflation. Conversely, real GDP provides a more accurate measurement of a nation's output by adjusting for price changes due to inflation or deflation, using a price index such as the GDP deflator, consequently reflecting the actual changes in quantity of goods and services produced.

To provide the correct option in the final answer: Since nominal GDP is calculated using the current market prices at the time of measurement, while real GDP adjusts these figures to account for inflation, the main distinguishing factor is the prices used in their calculations.