The year whose prices are being used to calculate the real GDP is called ______.

The correct answer is base year.

Key Points

• GDP is the market value of all the final goods and services produced within a country for a given time period.
  • Real GDP is a measurement of economic output that accounts for the effects of inflation or deflation.
  • The difference between nominal GDP and real GDP is the adjustment for inflation.
  • Since nominal GDP is calculated using current prices, it does not require any adjustments for inflation.​
  • The base year of the national accounts is chosen to enable inter-year comparisons. It gives an idea about changes in purchasing power and allows the calculation of inflation-adjusted growth estimates.

Important Points

• Real GDP :
  • Real GDP is said to be the value of all goods and services determined in an economy after taking into account the rate of inflation.
  • In other words, it is the inflation-adjusted value of goods and services produced in an economy in a year; therefore it is also known as inflation-adjusted gross domestic product.
  • Real GDP in addition to inflation, also takes into account deflation. 
  • The Real GDP formula can be represented as,
    • Real GDP = Nominal GDP / Deflator
• Nominal GDP:
  • Nominal gross domestic product (GDP) is the value of all the final goods and services at current market prices. 
  • In other words, it is the GDP calculated at the current market prices.
  • It takes into account factors such as inflation, price changes, changing interest rates, and money supply at the time of determining GDP.
  • The rise in inflation increases the nominal GDP.
  • The Nominal GDP formula can be represented as,
    • Nominal GDP = Real GDP x GDP Deflator