What is the 'Real Economic Growth Rate'

The real economic growth rate measures economic growth, in relation to gross domestic product (GDP), from one period to another, adjusted for inflation - in other words, expressed in real as opposed to nominal terms. The real economic growth rate is expressed as a percentage that shows the rate of change for a country's GDP from one period to another, typically from one year to the next. Another alternate economic growth measure is gross national product (GNP), which is sometimes preferred [if a nation's economy is substantially dependent on foreign earnings.

BREAKING DOWN 'Real Economic Growth Rate'

The real economic growth rate, also referred to as the growth rate of real GDP, is a more useful measure than the nominal GDP growth rate due to the fact that it takes into account the effect that inflation has on economic data. The real economic growth rate is a "constant dollar" figure, and therefore provides a consistent measure, one that is not subject to being distorted by periods of extreme inflation or deflation.

Calculating the Real GDP Growth Rate

GDP is calculated as the sum of consumer spending, business spending, government spending and the total of exports minus imports. In order to factor in inflation and arrive at the real GDP figure, the calculation is as follows:

Real GDP = GDP / (1 + Inflation since base year)

The base year is a designated year, updated periodically by the government, that is used as a comparison point for economic data such as the GDP.

Once real GDP is calculated, then the real GDP growth rate is calculated as follows:

Real GDP growth rate = (most recent year's real GDP - the previous year's real GDP) / the previous year's real GDP

Using the Real Economic Growth Rate Figure

Knowing a country's real economic growth rate is helpful to government policymakers in making decisions about fiscal policy and other steps a government may take in order to accomplish goals such as spurring economic growth or controlling inflation. Real economic growth rate figures are commonly used for one or both of two purposes. The first primary use of the real economic growth rate figure is in comparing the current rate of economic growth to the growth rate during previous time periods, in order to ascertain the general trend of the rate of economic growth over time. Secondarily, real economic growth rate figures are helpful in comparing the growth rates of similar economies that have substantially different rates of inflation. Comparison of the nominal GDP growth rate for a country with only 1% inflation to the nominal GDP growth rate for a country with 10% inflation would be substantially misleading.

RELATED TERMS
  1. Real Gross Domestic Product (GDP)

    An inflation-adjusted measure that reflects the value of all ...
  2. Nominal GDP

    A gross domestic product (GDP) figure that has not been adjusted ...
  3. Economic Growth Rate

    A measure of economic growth from one period to another in percentage ...
  4. GDP Price Deflator

    An economic metric that accounts for inflation by converting ...
  5. Nominal

    An unadjusted rate, value or change in value. This type of measure ...
  6. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced ...
Related Articles
  1. Insights

    Economic Growth

    Economic growth happens when the market value of the goods and services in an economy increase in one time period as compared to a prior time period.
  2. Insights

    The GDP and its Importance

    GDP is an accurate indication of an economy's size. Few data points can match the GDP and its growth rate's conciseness.
  3. Trading

    Calculating the GDP Price Deflator

    The GDP price deflator adjusts gross domestic product by removing the effect of rising prices. It shows how much an economy’s GDP is really growing.
  4. Insights

    How The GDP Of The US Is Calculated

    The US GDP may not be a perfect economic measure, but the ability to compare it to prior periods and other countries makes it the most applicable.
  5. Insights

    Nominal vs. Real GDP

    GDP stands for gross domestic product and is the measure of the total economic output of the goods and services of a country.
  6. Insights

    How To Calculate The GDP Of A Country

    We explain how to calculate the GDP of a country using two different approaches.
  7. Insights

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  8. Investing

    Interest Rates Explained: Nominal, Real, Effective

    Interest rates are divided into subcategories. Smart investors look beyond the nominal or coupon rate of a bond or loan to see if it fits their objectives.
  9. Insights

    Healthiest And Safest European Economies

    Economic indicators are to economists what symptoms are to doctors: signs of the relative well-being of the patient.
RELATED FAQS
  1. What is the benefit of using real GDP over GDP?

    Find out why real GDP allows economists to measure changes in the economic growth or decline of a country more accurately ... Read Answer >>
  2. Is real GDP a better index of economic performance than GDP?

    Learn why real GDP is a better index for expressing the output of an economy, as it takes into account the factors that distort ... Read Answer >>
  3. What does it signify if there is a large discrepancy between a nation's real and ...

    Discover the differences between real GDP and nominal GDP and what it means when there is a large discrepancy between the ... Read Answer >>
  4. When do economists use real GDP instead of GDP?

    Learn about the purposes for which economists rely on real GDP. Find out how real GDP is calculated and how it is important ... Read Answer >>
  5. Is the nominal value of GDP a sufficient metric for measuring the economy's health?

    Find out whether the nominal value of gross domestic product is sufficient for measuring the health of an economy and how ... Read Answer >>
  6. How much of an economy's performance is captured by real GPD?

    Learn about the economic information captured by real GDP. Find out how real and nominal GDP are constructed and the purposes ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center