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 GDP, inflation-corrected GDP, or constant dollar GDP.
For example, say an economy has a nominal GDP of $100 million, the raw total of all goods and services as measured by their prices. Assume also that the economy has experienced 2% inflation over the course of the year. We would calculate real GDP as: 100 million / 1.02 = 98.03 million.
Real GDP measures an economy’s total goods and services in a given year, taking into account changes in price levels. It allows you to compare GDP by year because it takes into account inflation. It’s a good indicator of where the economy is in the business cycle.
Economists track real gross domestic product ( GDP ) to determine the rate that an economy is growing without any of the distorting effects of inflation. The real GDP number allows them to measure growth more accurately.
Examples include clothing, food, and health care. Investment, I, is the sum of expenditures on capital equipment, inventories, and structures. Examples include machinery, unsold products, and housing. Government spending, G, is the sum of expenditures by all government bodies on goods and services.
Nominal GDP is an assessment of economic production in an economy that includes current prices in its calculation. In other words, it doesn’t strip out inflation or the pace of rising prices, which can inflate the growth figure.
The U.S. GDP is primarily measured based on the expenditure approach. This approach can be calculated using the following formula: GDP = C + G + I + NX (where C=consumption; G=government spending; I=Investment; and NX=net exports). Consumption refers to private consumption expenditures or consumer spending.
Consequently, real GDP provides a more accurate portrait of economic growth than nominal GDP because it uses constant prices, making comparisons between years more meaningful by allowing for comparisons of the actual volume of goods and services without considering inflation.
The sales of used goods are not included because they were produced in a previous year and are part of that year’s GDP. Transfer payments are payments by the government to individuals, such as Social Security. Transfers are not included in GDP, because they do not represent production.
So, let’s say an economy has a nominal GDP of $10 billion and a real GDP of $8 billion. The economy’s GDP price deflator would be calculated as ($10 billion / $8 billion) x 100, which equals 125. The result means that the aggregate level of prices increased by 25 percent from the base year to the current year.
Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation. Real GDP is nominal GDP, adjusted for inflation to reflect changes in real output. Trends in the GDP deflator are similar to changes in the Consumer Price Index, which is a different way of measuring inflation.
The value at constant prices is calculated by deflating the value at current prices with the service sub-index of the urban consumer price index.
Editors Pick Real GDP. Real GDP is a calculation of GDP that is adjusted for inflation. Nominal GDP. Nominal GDP is calculated with inflation. Actual GDP. Actual GDP is the measurement of a country’s economy at the current moment in time. Potential GDP.
GDP by Country
|#||Country||GDP ( abbrev. )|
|1||United States||$19.485 trillion|
Nominal GDP measures the value of the goods and services produced in a country at current prices, providing a snapshot of a country’s current output in the current moment. It tells us the present-day value of a country’s products and services.