What is the primary distinction between nominal GDP and real GDP?

The primary distinction between nominal GDP and real GDP lies in how they account for price changes over time, specifically inflation or deflation. Nominal GDP is measured using current prices, meaning it reflects the total market value of all final goods and services produced in a country within a given time period, evaluated at the prices that exist at that time. This makes nominal GDP sensitive to price level changes; if prices rise due to inflation, nominal GDP may indicate growth simply due to higher prices rather than an actual increase in production.

In contrast, real GDP adjusts for inflation by using constant prices from a specific base year. This adjustment allows for a more accurate reflection of an economy's true growth in terms of the quantity of goods and services produced, as it removes the effects of price level changes.

Therefore, the correct understanding is that nominal GDP is measured at current prices, distinguishing it from real GDP, which is adjusted for inflation.