GDP adjusted for inflation using a price deflator and a base year is called what?

GDP adjusted for inflation using a price deflator and a base year is called what?

• A. GDP growth rate
• B. Price deflator
• C. Real GDP
• D. Nominal GDP

Answer: (C)

The idea is to measure how much the economy actually produces, removing the effects of changing prices over time. When you value output using constant prices from a base year, you’re holding the price level fixed and only counting changes in quantity. This is real GDP. To get real GDP from the observed nominal value, you use a price deflator—a broad price index that shows how much prices have changed—and you apply it so the value reflects constant base-year prices. The base year is simply the reference point for those constant prices. Nominal GDP, by contrast, is measured with current prices and can rise just because prices rise, even if production stays the same. A price deflator is the tool used to strip out those price changes, turning nominal into real. A GDP growth rate is the percentage change in real GDP over time, so it’s a rate derived from the real-measured level, not the inflation-adjusted level itself.

The idea is to measure how much the economy actually produces, removing the effects of changing prices over time. When you value output using constant prices from a base year, you’re holding the price level fixed and only counting changes in quantity. This is real GDP. To get real GDP from the observed nominal value, you use a price deflator—a broad price index that shows how much prices have changed—and you apply it so the value reflects constant base-year prices. The base year is simply the reference point for those constant prices.

Nominal GDP, by contrast, is measured with current prices and can rise just because prices rise, even if production stays the same. A price deflator is the tool used to strip out those price changes, turning nominal into real. A GDP growth rate is the percentage change in real GDP over time, so it’s a rate derived from the real-measured level, not the inflation-adjusted level itself.