Final answer:
Nominal GDP measures current production using current prices, while real GDP measures current production using base-year prices.
Step-by-step explanation:
The correct statement that represents the relationship between nominal GDP and real GDP is: Nominal GDP measures current production using current prices, while real GDP measures current production using base-year prices.
Nominal GDP measures the value of goods and services produced in a country using the current prices at the time. Real GDP, on the other hand, adjusts for inflation by using the prices from a base year as a constant reference. It allows us to measure the actual changes in production by eliminating the impact of price changes.
For example, if the prices of goods increase over time, nominal GDP would show an increase even if the actual level of production remains constant. Real GDP, however, would account for the price increase and provide a more accurate measure of the change in production.
This means that nominal GDP is the market value of all final goods and services produced within a country in a particular period, calculated using the prices that are current in the year that the GDP is measured. In contrast, real GDP is adjusted to account for changes in price or inflation, using prices from a chosen base year to provide a more accurate reflection of the economy’s size and how much it is truly growing or shrinking.