What distinguishes nominal GDP from real GDP?

Nominal GDP and real GDP are distinguished primarily by their treatment of inflation. Nominal GDP measures the value of all finished goods and services produced within a country's borders in a specific time period using the prices that are current in the year in which the output is produced. This means that nominal GDP is affected by changes in price level, including inflation or deflation.

On the other hand, real GDP adjusts nominal GDP for the effects of inflation, providing a clearer view of an economy's growth by showing how much the economy has expanded in terms of the actual quantity of goods and services produced, without the influence of changing price levels. This adjustment allows for comparisons of economic performance across different time periods, making it easier to ascertain whether real growth has occurred.

Thus, the correct response highlights that real GDP accounts for inflation while nominal GDP does not, making it the fundamental distinction between the two measures.