What is the main difference between nominal GDP and real GDP?

The main difference between nominal GDP and real GDP is that nominal GDP is measured using current dollars, reflecting the prices that are available at the time of measurement, while real GDP is adjusted for inflation, providing a more accurate representation of an economy's output over time.

When assessing economic performance, nominal GDP can increase not only due to actual growth in the quantity of goods and services produced but also because of rising prices (inflation). In contrast, real GDP strips away the effects of inflation, allowing for a clearer comparison of economic productivity across different time periods. This adjustment helps economists and policymakers understand whether the economy is genuinely expanding or if increases are merely a result of inflationary pressures.

The other options miss this critical aspect of inflation adjustment. While nominal GDP does not account for inflation, real GDP specifically adjusts for it to provide a clearer picture of economic growth. Furthermore, real GDP captures the total value of goods and services produced, including services, so the statement about real GDP only measuring goods is inaccurate. Lastly, while nominal GDP can often be higher than real GDP in times of inflation, it is not a universal truth in all circumstances, as changes in price levels can cause variations in their relationship.