Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
GDP Deflator
B
Inflation Rate
C
Purchasing Power
D
Economic Growth
Understanding the Answer
Let's break down why this is correct
Answer
Nominal GDP is the total value of all goods and services produced in a country, measured using current prices. Real GDP, on the other hand, adjusts for inflation, providing a more accurate picture of economic growth over time. Similarly, a price index measures the average change in prices over time, reflecting inflation or deflation. Just as real GDP helps us understand true economic growth by removing the effects of price changes, a similar concept to the price index is the GDP deflator, which shows how much of the change in nominal GDP is due to price changes versus actual growth in production. For example, if nominal GDP rises but real GDP does not, it indicates that prices have increased rather than the economy actually producing more goods and services.
Detailed Explanation
The GDP deflator measures how much prices have changed over time. Other options are incorrect because The inflation rate shows how fast prices are rising, but it doesn't measure the overall price level like the GDP deflator does; Purchasing power tells us how much we can buy with our money, but it doesn't directly relate to GDP calculations.
Key Concepts
Nominal GDP vs. Real GDP
Price Index and its role in GDP calculations
Inflation
Topic
GDP Calculations and Comparisons
Difficulty
medium level question
Cognitive Level
understand
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