Nominal GDP fails to account for changes in which factor?

• A. Inflation
• B. Real GDP
• C. Price deflator
• D. GDP growth rate

Answer: (C)

Nominal GDP is calculated using current prices, so it moves with both how much is produced and how prices change. If the overall price level rises (inflation), nominal GDP can increase even if the actual quantity of goods and services produced stays the same. The price deflator measures that overall price level change, and real GDP uses it to strip out price effects so you’re just looking at quantities. So nominal GDP “fails” to account for changes in the price level, which is exactly what the price deflator tracks. For example, if prices go up by 10% but output is unchanged, nominal GDP would rise, while real GDP would stay the same.