Correct Option
The correct option is 1 only
Explanation
Gross Domestic Product (GDP) measures the monetary value of all final goods and services produced within a country's borders in a specific time period. To distinguish between growth due to inflation and growth due to actual production increases, economists calculate GDP in two ways: Nominal GDP (at current prices) and Real GDP (at constant prices).
Statement-wise Analysis
- Statement 1 is Correct: Nominal GDP is the value of all final goods and services produced in an economy during a given year, calculated using the current prevailing prices of that year. It does not adjust for inflation.
- Statement 2 is Incorrect: Real GDP is calculated by valuing the output of goods and services at constant prices (prices of a specific base year). It eliminates the effect of price changes (inflation or deflation) to measure the actual volume of production.
- Statement 3 is Incorrect: Since Real GDP uses fixed base-year prices, price fluctuations do not affect it. Therefore, if Real GDP changes, it implies a change in the physical volume or quantity of goods and services produced, not a change in prices.
Key Takeaway
Nominal GDP reflects both changes in output and changes in prices (inflation), whereas Real GDP reflects only changes in the physical output of an economy, making it a better indicator of economic growth.