PART OF
Guide to Inflation
ECONOMY ECONOMICS
Real Gross Domestic Product (Real GDP)
By
AKHILESH GANTI
Reviewed by
ERIC ESTEVEZ Updated Mar 30, 2021
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.
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Nominal vs. Real GDP
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 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.
The Bureau of Economic Analysis (BEA) provides a quarterly report on GDP1 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.
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. Nominal GDP is 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 adjustment for inflation. 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).
Real GDP=
R
Nominal GDP
where:
GDP=Gross domestic product
R=GDP deflator
The BEA provides the deflator on a quarterly basis. The GDP deflator is a measurement of inflation since a base year (currently 2012 for the BEA). Dividing the nominal GDP by the deflator removes the effects of inflation. 2
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, then real GDP is calculated as $1,000,000 / 1.01, or $990,099.
Frequently Asked Questions
What does 'real' mean in real GDP?
Real GDP tracks the total value of goods and services calculating the quantities but using constant prices that are adjusted for inflation. This is opposed to nominal GDP that does not account for inflation. Adjusting for constant prices makes it a measure of "real" economic output for apples-to-apples comparison over time and between countries.
What does real GDP measure?
Real GDP is an inflation-adjusted measurement of a country’s economic output over the course of a year. The U.S. GDP is primarily measured based on the expenditure approach and calculated using the following formula: GDP = C + G + I + NX (where C=consumption; G=government spending; I=Investment; and NX=net exports). 
How will real and nominal GDP differ from one another?
In inflationary periods, real GDP will be lower than nominal GDP. In deflationary times, real GDP will be higher.
Take for example a hypothetical country that had a nominal GDP of $100 Billion in 2000, which grew by 50% to $150 billion by 2020. Over the same period of time, inflation reduced the relative purchasing power of the dollar by 50%. Looking at just the nominal GDP, the economy appears to be performing very well, whereas the real GDP expressed in 2000 dollars would actually indicate a reading of $75 billion, revealing in fact a net overall decline in economic growth had occurred. It is due to this greater accuracy that real GDP is favored by economists as a method of measuring economic performance
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 success of a society more generally. 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 done 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
Related Terms
Gross Domestic Product (GDP)
Gross domestic product (GDP) is the monetary value of all finished goods and services made within a country during a specific period. more
Gross National Product (GNP) Deflator Definition
The gross national product (GNP) deflator is an economic metric that accounts for the effects of inflation in the current year's GNP. more
Real Economic Growth Rate Definition
The real economic growth rate is a measure of economic growth that adjusts for inflation and is expressed as a percentage. more
Real Value
The real value of an item, also called its relative price, is its nominal value adjusted for inflation. more
Inflationary Gap Definition
An inflationary gap measures the difference between the actual real gross domestic product (GDP) and the GDP of an economy at full employment. more
GDP Price Deflator Definition
The GDP price deflator measures the changes in prices for all of the goods and services produced in an economy. more
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