How does nominal GDP differ from real GDP?

Nominal GDP is defined as the total monetary value of all finished goods and services produced within a country's borders in a specific time period, measured using current market prices. This means that it does not account for changes in price levels or inflation; it reflects the value at the point in time when the goods and services are produced and sold. In contrast, real GDP adjusts for inflation, allowing for a comparison of economic output from one period to another by removing the effects of price changes. It is calculated using constant prices from a base year, which means that it provides a more accurate representation of an economy's true growth by reflecting the volume of production rather than just money value influenced by fluctuating prices.

The distinction between nominal and real GDP is essential for understanding economic performance over time, as it helps economists and policymakers determine whether the economy is genuinely growing or if the changes in GDP are merely a reflection of inflationary pressures. In this context, the statement that nominal GDP is measured in current prices while real GDP is in constant prices encapsulates the fundamental difference between the two concepts.

Other choices introduce misconceptions about GDP metrics, failing to correctly capture the essence of the distinction between nominal and real GDP.