What Is Real GDP?
Real gross domestic product, or real GDP, is a measure of the value of all goods and services produced by an economy in a period. Because the value is adjusted for inflation it can separate out the effects of changes in price levels and can provide a more detailed measure of economic productivity growth.
Nominal GDP vs. Real GDP
In contrast, nominal GDP is the GDP evaluated at current market prices, and includes all of the changes in market prices that have occurred during the current year due to inflation or deflation as well as changes in production.
Real GDP Formula
The formula for real GDP is nominal GDP divided by the GDP deflator. The Bureau of Economic Analysis calculates the deflator for the United States. It measures inflation from a designated base year (currently 2012), and is the ratio of price levels today compared to price levels for the base year.
- If the nominal GDP > the real GDP, the deflator > 1 and there has been inflation.
- If the nominal GDP < the real GDP, the deflator < 1 and there has been deflation.
For example, if real GDP was $17.096 trillion in 2017 and the nominal GDP was $19.391 trillion, then the deflator =
Real GDP Per Capita
Real GDP per capita measures the average level of national income per person and gives a rough indication of the productivity of an economy and its average living standards.
How to Find Real GDP
Real GDP and real GDP per capita data can be found on the website for the US Bureau of Economic Analysis. They report their findings each quarter and release information to the public regularly.
Why Real GDP Is Important
Governments and international banking authorities use GDP as a tool to measure an economy's growth over a period of time, based on how much the economy produces. Looking at the economic output over time can show trends of growth or decline.
Using a measure, like real GDP, that does not reflect changes in price levels allows economists to measure growth unexaggerated by changes in price levels.
Therefore, real GDP provides a more reliable source for assessing long-term national economic performance than nominal GDP.
