What is Real GDP

 

Real Gross Domestic Product (GDP)

Real Gross Domestic Product is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year but expressed in base-year prices. 

It is called “Real” as it Adjusts the constant prices makes it a measure of "real" economic output for apples-to-apples comparison over time and between countries. It is often referred to as Constant-price GDP, Inflation-corrected GDP or Constant dollar GDP

Key Points

• It is a macroeconomic statistic that measures the value of the goods and services produced by an economy in a specific period, adjusted for inflation. 
• Essentially, it measures a country's total economic output, adjusted for price changes.
• Governments use both nominal and real GDP as metrics for analyzing economic growth and purchasing power over time. 
• This is done using the GDP price deflator (also called the implicit price deflator), which measures the changes in prices for all of the goods and services produced in an economy.
• Calculating real GDP is a complex process typically best provided by economists. 

Calculate GDP

GDP can be determined via three primary methods and all three methods should yield the same figure when correctly calculated. 

These three approaches are often termed the

• Expenditure approach
• The output/production approach
• The income approach

Calculating real GDP is done by dividing nominal GDP by the GDP deflator (R).

For Example, The economy's prices have increased by 1% since the base year and the deflating number is 1.01.  If nominal GDP was 1 billion.  The real GDP is calculated as $1 billion / 1.01

Why we should Measure Real GDP.?

• Countries with larger GDPs will have a greater amount of goods and services generated within them, and will generally have a higher standard of living. For this reason, many citizens and political leaders see GDP growth as an important measure of national success, often referring to “GDP growth” and “economic growth” interchangeably. 
• GDP enables policymakers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat such as a recession or inflation looms on the horizon. 
• By accounting for inflation, real GDP is a better gauge of the change in production levels from one period to another.

Why critiques are against GDP?

• Many economists have argued that GDP should not be used as a proxy for overall economic success
• GDP does not account for the informal economy, does not count care work or domestic labor in the home, ignores business-to-business activity, and counts costs and wastes as economic activity, among other shortcomings.