What is the ‘Real Gross Domestic Product (GDP)’
Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices, and is often referred to as “constant-price,” “inflation-corrected” GDP or “constant dollar GDP.” Unlike nominal GDP, real GDP can account for changes in price level and provide a more accurate figure of economic growth.
Explaining ‘Real Gross Domestic Product (GDP)’
GDP is a macroeconomic assessment that measures the value of the goods and services produced by an economic entity in a specific period, adjusted for inflation. GDP is derived by valuing all production by an economy using a specific year’s average prices. Governments use GDP as a comparison tool to analyze an economy’s purchasing power and growth over time. This is done by looking at the economic output of two periods and valuing each period with the same average prices and comparing the two together.
GDP Versus Nominal GDP
Nominal GDP is a macroeconomic assessment that includes current prices in its measure. The main differentiating factor between nominal GDP and GDP is nominal GDP includes inflation and is therefore normally higher than GDP. Since GDP is calculated using a base year and does not include inflation, it represents an economy’s nominal GDP if that economy did not realize any price changes when compared to the base year.
Calculating GDP and Measuring Economic Production and Services
GDP is derived as nominal GDP over a deflating number (R): (nominal GDP) / (R). The deflator is the measurement of inflation since the base year; dividing the nominal GDP number by the deflator removes any effects of inflation. For example, if an economy’s prices have increased by 1% since the base year, the deflating number is 1.01. If nominal GDP was $1 million, GDP is calculated as $1,000,000 / 1.01, or $990,099.
Further Reading
- Analysis of the effect of inflation, interest rates, and exchange rates on Gross Domestic Product (GDP) in Indonesia – repository.petra.ac.id [PDF]
- The effect of real gross domestic product (GDP) growth rate convergence on exchange rate volatility in search for the East African monetary union – academicjournals.org [PDF]
- Tourism as a long-run economic growth factor: an empirical investigation for Greece using causality analysis – journals.sagepub.com [PDF]
- The impact of the financial sector reforms on savings, investments and growth of gross domestic product (GDP) in Ghana – www.clutejournals.com [PDF]
- Contribution of oil in economic growth of Saudi Arabia – www.tandfonline.com [PDF]
- On biomass energy consumption and real output in the US – www.tandfonline.com [PDF]
- Effects of macroeconomic variables on gross domestic product (GDP) in Pakistan – www.sciencedirect.com [PDF]
