An index used to convert nominal GDP to real GDP by removing the effect of price changes is called what?

• A. Price deflator
• B. Real GDP
• C. Nominal GDP
• D. GDP per capita

Answer: (A)

When you want to compare how much the economy produced across years without the distortion of price changes, you use a price index that applies to all final goods and services in GDP. That index is the price deflator. It converts nominal GDP, which is measured with current prices, into real GDP, which is valued in constant base-year prices and thus shows real growth rather to inflation. In practice, real GDP equals nominal GDP divided by the GDP deflator (expressed as a ratio), stripping out price changes.

Why this fits: the price deflator captures the overall price level for everything produced domestically, not just consumer goods. It differs from Real GDP, which is the result you obtain after adjustment; Nominal GDP is the unadjusted figure, and GDP per capita is real GDP per person. The GDP deflator specifically serves as the broad index used to remove inflation when moving from nominal to real GDP. For example, if nominal GDP is 12 trillion and the GDP deflator is 120, real GDP would be 10 trillion in base-year dollars, illustrating the adjustment for price level changes.