Which of the following statements correctly distinguishes between nominal gross domestic product (GDP) and real gross domestic product in macroeconomics?

Introduction / Context:
Macroeconomists often distinguish between nominal gross domestic product and real gross domestic product when analysing the performance of an economy over time. This distinction is important because changes in prices can make the total money value of output rise even if the actual physical quantity of goods and services has not increased. Understanding how nominal and real GDP are defined allows you to separate the effect of inflation from the effect of real growth in output.

Given Data / Assumptions:
- We are comparing two measures of GDP: nominal GDP and real GDP.
- Prices in the economy can change over time due to inflation or deflation.
- The question asks how each measure values production in terms of prices used.
- We assume standard textbook definitions based on current and constant prices.

Concept / Approach:
Nominal GDP is the total money value of all final goods and services produced within a country in a given period, measured using the prices that actually prevail in that same period, also called current prices. Real GDP, in contrast, measures the same physical quantities of output but values them at prices from a chosen base year, called constant prices. Real GDP removes the effect of changes in the price level, so it reflects only changes in the volume of production. This distinction helps policy makers and analysts understand whether the economy is truly producing more goods and services or whether the observed increase in nominal GDP is mainly due to inflation.

Step by Step Solution:
Step 1: Recall that nominal GDP uses current prices of the period in which output is produced. Step 2: Recall that real GDP uses constant base year prices to value current output, holding the price structure fixed. Step 3: Examine option D, which states that nominal GDP values production at current prices, whereas real GDP values production at constant prices. This matches the standard definitions. Step 4: Option A reverses the two definitions and is therefore incorrect. Step 5: Option B incorrectly suggests that real GDP is measured at the cost of resources, which is not how macroeconomic GDP is defined. Step 6: Option C makes a blanket claim about underestimation and overestimation without relating to current or constant prices, so it does not represent the correct distinction.

Verification / Alternative check:
Consider a simple economy that produces only one good, say chairs. In year 1, 100 chairs are produced at a price of 10 units of currency, so nominal GDP is 1000. In year 2, the economy produces 110 chairs, but the price rises to 12. Nominal GDP in year 2 is 1320. If we value year 2 output at year 1 prices, real GDP would be 110 chairs times 10, which is 1100. The increase from 1000 to 1100 in real GDP reflects the real growth in quantity produced, whereas the rest of the rise in nominal GDP comes from higher prices. This example confirms that nominal GDP uses current prices and real GDP uses constant prices.

Why Other Options Are Wrong:
Option A is wrong because it swaps the roles of nominal and real GDP, saying nominal uses constant prices and real uses current prices, which is exactly the opposite of the correct definitions.
Option B is wrong because both nominal and real GDP are valued at market prices; the difference is whether those prices are current or constant, not whether they reflect resource cost.
Option C is wrong because nominal and real GDP are both carefully constructed and neither is defined as consistently underestimating or overestimating production; their difference lies in the price base used.

Common Pitfalls:
Students often confuse current and constant prices or forget which term, nominal or real, goes with which pricing method. Another common error is to think that real GDP is measured in physical units such as tonnes or units of goods, when in fact it is still measured in monetary terms but using base year prices. It is also important not to assume that a higher nominal GDP always implies higher real GDP, because inflation can raise nominal values without increasing real output. Keeping these concepts separate will help you answer many macroeconomics questions correctly.

Final Answer:
Nominal GDP values production at current prices, whereas real GDP values production at constant prices.