Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
To measure nominal GDP
B
To adjust nominal GDP for inflation
C
To calculate government deficits
D
To determine consumer spending
Understanding the Answer
Let's break down why this is correct
Answer
The GDP deflator is an important tool used to measure the overall level of prices in an economy. Its main purpose is to help convert nominal GDP, which is the total value of goods and services at current prices, into real GDP, which reflects the value at constant prices. This adjustment is necessary because it accounts for inflation, ensuring that we can compare economic output over different years without the distortion of rising prices. For example, if a country produced the same amount of goods in two different years but prices increased in the second year, nominal GDP would be higher, but real GDP would show that the actual quantity produced remained the same. By using the GDP deflator, we can see the true growth of the economy by focusing on the volume of goods and services rather than just their prices.
Detailed Explanation
The GDP deflator helps us adjust nominal GDP for inflation. Other options are incorrect because Some might think the deflator measures nominal GDP directly; It's a common mistake to link the deflator with government deficits.
Key Concepts
GDP Deflator
Topic
Calculating Real GDP and Deficits
Difficulty
easy level question
Cognitive Level
understand
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