Adjusting Nominal GDP for Inflation to Get Real GDP

Steps:

• Recognize nominal GDP measures output at current-year prices, including inflation effects.
• Note the formula multiplies nominal GDP by the base-year price index (set to 100) to normalize prices.
• Divide by the current-year price index to remove inflation distortions from the current period.
• Result is real GDP, valued at constant base-year prices for accurate growth comparison.

Why B is correct:

• Real GDP is defined as nominal GDP adjusted for price changes using the formula: Real GDP = Nominal GDP × (Base-year price index / Current-year price index), isolating volume changes.

Why the others are wrong:

• A: Gross national income adds net foreign income to GDP, unrelated to price index adjustment.
• C: Net domestic product subtracts depreciation from GDP, not involving price indices.
• D: Identical to C, so same error in definition.

Final answer: B