Real Economic Growth Rate

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.