Which metric adjusts nominal GDP to account for price changes across the economy?

• A. Price Level Indicator
• B. Cost-of-Living Index
• C. Unemployment Rate
• D. GDP Deflator

Answer: (D)

This question hinges on how to strip out price changes when looking at overall economic output. The GDP deflator is the price index that measures the average price of all final goods and services produced within a country’s borders. Because it covers everything in GDP—consumption, investment, government spending, and net exports—it captures inflation or deflation across the entire economy, not just a fixed basket of consumer goods.

That broad scope is why it’s used to convert nominal GDP into real GDP. Real GDP shows how much of the change in GDP is due to changes in actual output, removing the effects of changing price levels. In formula terms, Real GDP equals Nominal GDP divided by the GDP deflator (with the deflator expressed as a decimal).

Other options don’t fit as well: a price level indicator can be any gauge of overall price levels and isn’t a specific tool for converting nominal to real GDP; a cost-of-living index (like the CPI) measures consumer prices for a fixed basket and misses price changes in many other components of GDP; and the unemployment rate measures labor market conditions, not price changes.