Real GDP uses base-year prices to value output; what is true about the base year?

Real GDP uses base-year prices to value output; what is true about the base year?

• A. The base year is the year with the highest price level.
• B. The base year uses current prices to measure quantity.
• C. The base year prices are used to value output in all years.
• D. The base year is the year with no inflation.

Answer: (C)

Real GDP is computed by valuing output using constant prices from a chosen base year, applying those base-year prices to the quantities produced in every year. This keeps price levels fixed so that changes in real GDP reflect only changes in the quantities produced, not in prices. That’s why the statement that base-year prices are used to value output in all years is correct. The base year isn’t defined by having the highest price level, nor by eliminating inflation entirely, and it isn’t about using current-year prices to value output. Those ideas describe other concepts (like nominal GDP or arbitrary selections of reference year), but real GDP relies on fixed base-year prices across all years.

Real GDP is computed by valuing output using constant prices from a chosen base year, applying those base-year prices to the quantities produced in every year. This keeps price levels fixed so that changes in real GDP reflect only changes in the quantities produced, not in prices. That’s why the statement that base-year prices are used to value output in all years is correct.

The base year isn’t defined by having the highest price level, nor by eliminating inflation entirely, and it isn’t about using current-year prices to value output. Those ideas describe other concepts (like nominal GDP or arbitrary selections of reference year), but real GDP relies on fixed base-year prices across all years.