Which statement best explains why GDP is adjusted for inflation?

Question

BlackTom AI · Accepted Answer

Question restatement: The prompt asks which statement best explains why GDP is adjusted for inflation. Answer choices are:
- A: To avoid double counting intermediate goods
- B: To compare output across countries
- C: To measure changes in production rather than prices
- D: To include only domestically produced goods

Now, evaluating each option in turn:

Option A: To avoid double counting intermediate goods
This statement is incorrect in the context of inflation adjustment. Double counting of intermediate goods is a concern in the calculation of GDP (which is why only final goods and services are counted), but inflation adjustment relates to changing price levels over time, not the issue of intermediate vs final goods. Therefore, this option misidentifies the purpose of inflation adjustment.

Option B: To compare output across countries
This is partly true in a broader sense—economic statistics are sometimes adjusted to enable cross-country comparisons. However, inflation adjustment (to obtain real GDP) is primarily about removing price level changes over time within a single economy, not about cross-country comparability. When comparing across countries, analysts often use GDP at purchasing power parity or specific price-adjusted measures, but the inflation adjustment discussed here refers to real vs nominal GDP, not international comparison per se. Thus this option is not the best explanation for inflation adjustment.

Option C: To measure changes in production rather than prices
This is the core reason for adjusting GDP for inflation. By converting nominal GDP (which can move up or down with both production and price level changes) into real GDP, we isolate changes attributable to actual volume of production, removing the distorting influence of inflation. This aligns with the standard economic concept of real GDP as production adjusted for price level.

Option D: To include only domestically produced goods
GDP inherently measures domestically produced goods and services within a country, regardless of who owns the factors of production. Inflation adjustment does not change this geographic scope; it only strips out price level changes to reflect real output. Therefore this option describes a different aspect of GDP and is not about inflation adjustment.

In summary, each option has a distinct focus, but option C aligns directly with the purpose of adjusting GDP for inflation: to isolate production changes from price fluctuations. The other options touch on related GDP concepts or cross-country considerations but do not capture the primary rationale for inflation-adjusted (real) GDP.

ECON_002_001_25F Problem Set 2

Which statement best explains why GDP is adjusted for inflation?

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