Which statement is true about Real GDP?

Which statement is true about Real GDP?

• A. It uses current-year prices
• B. It uses base-year prices
• C. It is always higher than nominal GDP
• D. It excludes government spending

Answer: (B)

Real GDP is calculated using prices from a base year, so the price level is held constant and only changes in the amount of goods and services produced are counted. This inflation adjustment lets you compare how much the economy is producing over time, without price changes muddying the picture. Because it relies on base-year prices, it’s measuring real output, not current prices. It’s not always higher than nominal GDP—when prices rise, nominal GDP can exceed Real GDP since nominal includes those price increases. And GDP in reality includes government spending as part of overall output, so Real GDP does not exclude government expenditures.

Real GDP is calculated using prices from a base year, so the price level is held constant and only changes in the amount of goods and services produced are counted. This inflation adjustment lets you compare how much the economy is producing over time, without price changes muddying the picture. Because it relies on base-year prices, it’s measuring real output, not current prices. It’s not always higher than nominal GDP—when prices rise, nominal GDP can exceed Real GDP since nominal includes those price increases. And GDP in reality includes government spending as part of overall output, so Real GDP does not exclude government expenditures.