What does Real GDP measure?

Real GDP measures the value of all goods and services produced in an economy, adjusted for inflation. This adjustment is essential because it allows for a more accurate comparison of economic output over different time periods, removing the effects of price changes. By using Real GDP instead of nominal GDP, economists can better understand the actual growth of an economy in terms of volume or quantity rather than just price changes.

The significance of Real GDP lies in its ability to reflect the true economic performance and standards of living over time. When policymakers and analysts want to gauge whether an economy is growing or declining, they rely on Real GDP figures to make informed decisions regarding fiscal policies and economic strategies.

In this context, the other options refer to different economic concepts. The potential production capacity of an economy relates to the maximum output it can produce without generating inflation, which is not directly measured by GDP. The phrase "all economic transactions within a fiscal year" refers to broader economic accounting, which encompasses financial transactions that may not translate directly into goods and services produced. Lastly, the maximum achievable output refers to potential GDP, not Real GDP itself.