How is Real GDP adjusted from Nominal GDP?

Real GDP is adjusted from Nominal GDP using the Consumer Price Index (CPI) as a measure of inflation. The adjustment is made by dividing the Nominal GDP by the CPI and then multiplying by 100. This process effectively removes the effects of price increases, allowing for a clearer comparison of economic output over different time periods.

When we look at Nominal GDP, it reflects the total economic output valued at current market prices, which can be influenced by inflation. However, Real GDP provides a more accurate picture of an economy’s size and performance by adjusting for changes in price level. By applying the CPI in this adjustment, economists can evaluate whether an economy is genuinely growing or if apparent growth is merely the result of rising prices.

This understanding is crucial for analyzing economic performance and making policy decisions, as it distinguishes between nominal increases in wealth due to inflation and real increases due to higher production and productivity. The other options do not accurately describe the relationship between Nominal GDP and Real GDP and lack the necessary components to make the adjustment correctly.