Canadian Securities Course (CSC) Level 1 Practice Exam

What is the difference between nominal and real GDP?

1. Nominal GDP is the dollar value of all goods and services produced in a year at prices that prevailed in the same year.

2. Real GDP removes the changes in output that are attributable to inflation and shows a better view on how GDP has grown solely based on productivity.

3. Nominal GDP includes inflation adjustments while real GDP does not.

4. Real GDP only accounts for government spending.

The correct answer is: Real GDP removes the changes in output that are attributable to inflation and shows a better view on how GDP has grown solely based on productivity.

The correct answer is B. Real GDP removes the changes in output that are attributable to inflation and provides a better view of how GDP has grown solely based on productivity. This is important because nominal GDP includes the impact of price level changes due to inflation, which can give a distorted view of economic growth. By adjusting for inflation, real GDP provides a more accurate representation of the actual increase in the production of goods and services over time. This distinction is key for policymakers and economists to assess true economic growth and productivity levels accurately. Option A is incorrect as it incorrectly defines nominal GDP as the dollar value of all goods and services produced in a year at prices that prevailed in the same year, without considering inflation adjustments. Option C is incorrect because nominal GDP includes the impact of inflation, while real GDP adjusts for inflation. Option D is incorrect as real GDP does not solely account for government spending but rather provides a measure of the total value of economic output after adjusting for inflation.