Which statement about Real GDP is true?

Which statement about Real GDP is true?

• A. It uses current-year prices
• B. It equals nominal GDP
• C. It uses prices from a base year
• D. It excludes government spending

Answer: (C)

Real GDP measures the value of goods and services using prices from a chosen base year, so it keeps price levels fixed and shows only changes in the actual quantities produced. This makes it possible to compare output over time without inflation distorting the picture. If you used current-year prices, you’d be looking at Nominal GDP, which moves with both how much is produced and how much prices change. GDP also includes government spending as part of overall expenditure, so Real GDP does not exclude government purchases. That’s why using base-year prices is the correct description of Real GDP.

Real GDP measures the value of goods and services using prices from a chosen base year, so it keeps price levels fixed and shows only changes in the actual quantities produced. This makes it possible to compare output over time without inflation distorting the picture. If you used current-year prices, you’d be looking at Nominal GDP, which moves with both how much is produced and how much prices change. GDP also includes government spending as part of overall expenditure, so Real GDP does not exclude government purchases. That’s why using base-year prices is the correct description of Real GDP.