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# Real Gross Domestic Product (Real GDP)

Part Of
Guide to Inflation
Explore The Guide
• Understanding Inflation
• Types of Inflation
• What Does Inflation Impact?
• Understanding Hyperinflation
• Understanding CPI
• Related Terms (A-I)
• Related Terms (J-Z)

## What Is Real Gross Domestic Product (Real GDP)?

Real gross domestic product (real 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.

### Key Takeaways

• Real gross domestic product (real 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", or "constant dollar" GDP.
• Real GDP makes comparing GDP from year to year and from different years more meaningful because it shows comparisons for both the quantity and value of goods and services.
• Real GDP is calculated by dividing nominal GDP over a GDP deflator.
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## Understanding Real GDP

Real GDP 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.

The Bureau of Economic Analysis (BEA) provides a quarterly report on GDP with headline data statistics representing real GDP levels and real GDP growth. Nominal GDP is also included in the BEA’s quarterly report under the name current dollar. Unlike nominal GDP, real GDP accounts for changes in price levels and provides a more accurate figure of economic growth.

The GDP price deflator is considered to be a more appropriate inflation measure for measuring economic growth than the consumer price index (CPI) because it isn't based on a fixed basket of goods.

## Nominal GDP vs. Real GDP

Because GDP is one of the most important metrics for evaluating the economic activity, stability, and growth of goods and services in an economy, it is usually reviewed from two angles: nominal and real. Nominal GDP is a macroeconomic assessment of the value of goods and services using current prices in its measure; it's also referred to as the current dollar GDP. Real GDP takes into consideration adjustments for changes in inflation. This means that if inflation is positive, real GDP will be lower than nominal, and vice versa. Without a real GDP adjustment, positive inflation greatly inflates GDP in nominal terms.

Economists use the BEA’s real GDP headline data for macroeconomic analysis and central bank planning. The main difference between nominal GDP and real GDP is the taking of inflation into account. Since nominal GDP is calculated using current prices, it does not require any adjustments for inflation. This makes comparisons from quarter to quarter and year to year much simpler, though less relevant, to calculate and analyze.

As such, real GDP provides a better basis for judging long-term national economic performance than nominal GDP. Using a GDP price deflator, real GDP reflects GDP on a per quantity basis. Without real GDP, it would be difficult to identify just from examining nominal GDP whether production is actually expanding—or it's just a factor of rising per-unit prices in the economy.

A positive difference in nominal minus real GDP signifies inflation and a negative difference signifies deflation. In other words, when nominal is higher than real, inflation is occurring and when real is higher than nominal, deflation is occurring.

## Real GDP Calculation

Calculating real GDP is a complex process typically best provided by the BEA. In general, calculating real GDP is done by dividing nominal GDP by the GDP deflator (R).

\begin{aligned}&\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{R}}\\&\textbf{where:}\\&\text{GDP}=\text{Gross domestic product}\\&\text{R} =\text{GDP deflator}\end{aligned}

The BEA provides the deflator on a quarterly basis. The GDP deflator is a measurement of inflation since a base year (currently 2017 for the BEA). Dividing the nominal GDP by the deflator removes the effects of inflation.

## Why Is Measuring Real GDP Important?

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.

## What Are Some Critiques of Using GDP?

Many economists have argued that GDP should not be used as a proxy for overall economic success, much less the more general success of a society. Like any measure, GDP has its imperfections. For instance, it 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.

In recent decades, governments have created various nuanced modifications in attempts to increase GDP accuracy and specificity. Means of calculating GDP have also evolved continually since its conception so as to keep up with evolving measurements of industry activity and the generation and consumption of new, emerging forms of digital and other intangible assets.

### Article Sources

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1. Bureau of Economic Analysis. "Gross Domestic Product." Accessed Oct. 19, 2021.

2. Bureau of Economic Analysis. "Gross Domestic Product, (Third Estimate), GDP by Industry, and Corporate Profits (Revised), 2nd Quarter 2021." Accessed Oct. 19, 2021.

3. Bureau of Economic Analysis. "Updated Summary of NIPA Methodologies." Accessed Oct. 19, 2021.