Which of the following statements is correct?

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Real GDP is GDP at constant prices, while the real exchange rate is the relative price of foreign goods in terms of domestic goods.

Real GDP uses constant prices; the real exchange rate compares the prices of goods.

Option (1) Real GDP is GDP at constant prices, while the real exchange rate is the relative price of foreign goods in terms of domestic goods. — Correct. Both halves are right.

Option (2) Real GDP is GDP at current prices, while the real exchange rate is the price of foreign currency in terms of domestic currency. — Incorrect. GDP at current prices is nominal GDP, and the price of foreign currency is the nominal exchange rate.

Option (3) Nominal GDP is GDP at constant prices, while the nominal exchange rate is the relative price of foreign goods in terms of domestic goods. — Incorrect. Nominal GDP uses current prices, and the second half is the real exchange rate.

Option (4) Real GDP is GDP at constant prices, while the real exchange rate is the number of units of domestic currency needed to get a unit of foreign currency. — Incorrect. The first half is right, but the second half defines the nominal exchange rate.

This question uses National Income Accounting and Open Economy Macroeconomics together.

NCERT (2026-27): “National Income Identity for an Open Economy … Recall that the real exchange rate is defined as the relative price of foreign goods in terms of domestic goods. …”

Glossary: “Nominal exchange rate – The number of units of domestic currency one must give up to get an unit of foreign currency; the price of foreign currency in terms of domestic currency.”

National Income Accounting (Introductory Macroeconomics): “2.4 Nominal and Real GDP … For comparison we take the help of real GDP. Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or constant prices). Since these prices remain fixed, if the Real GDP changes we can be sure that it is the volume of production which is undergoing changes. Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices. …”