# Real Gross Domestic Product (GDP)

## What is the 'Real Gross Domestic Product (GDP)'

Real gross domestic product (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" GDP or "constant dollar GDP." Unlike nominal GDP, real GDP can account for changes in price level and provide a more accurate figure of economic growth.

Next Up

## BREAKING DOWN 'Real Gross Domestic Product (GDP)'

GDP is a macroeconomic assessment that measures the value of the goods and services produced by an economic entity in a specific period, adjusted for inflation. GDP is derived by valuing all production by an economy using a specific year's average prices. Governments use GDP as a comparison tool to analyze an economy's purchasing power and growth over time. This is done by looking at the economic output of two periods and valuing each period with the same average prices and comparing the two together.

## GDP Versus Nominal GDP

Nominal GDP is a macroeconomic assessment that includes current prices in its measure. The main differentiating factor between nominal GDP and GDP is nominal GDP includes inflation and is therefore normally higher than GDP. Since GDP is calculated using a base year and does not include inflation, it represents an economy's nominal GDP if that economy did not realize any price changes when compared to the base year.

For example, say that in 2004, nominal GDP was \$200 billion. However, due to an increase in the level of prices from the base year 2000 to 2004, GDP is \$170 billion. The lower real GDP reflects the price changes while nominal GDP does not.

## Calculating GDP and Measuring Economic Production and Services

GDP is derived as nominal GDP over a deflating number (R): (nominal GDP) / (R). The deflator is the measurement of inflation since the base year; dividing the nominal GDP number by the deflator removes any effects of inflation. 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, GDP is calculated as \$1,000,000 / 1.01, or \$990,099.

GDP only counts the final production of an economy and measures the output of every good produced by quarter. Therefore, only finished products like a bicycle are counted toward GDP, and the manufacturing production of tires, frames and other bike components are not counted.

GDP also includes services as part of its measurement. However, services are sometimes hard to account for, and GDP omits such services as elderly care, childcare and various volunteer work. This factor has led some economists to believe GDP is not a truly accurate measure of economic growth.

RELATED TERMS
1. ### GDP Price Deflator

An economic metric that accounts for inflation by converting ...
2. ### Nominal GDP

A gross domestic product (GDP) figure that has not been adjusted ...
3. ### Gross Domestic Product - GDP

The monetary value of all the finished goods and services produced ...
4. ### Nominal Value

The stated value of an issued security. Nominal value in economics ...
5. ### Below Full Employment Equilibrium

A macroeconomic term used to describe a situation where an economy's ...
6. ### Real Value

Nominal value adjusted for inflation. Real value is obtained ...
Related Articles
1. Markets

### 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 economyâ€™s GDP is really growing.
2. Markets

### 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.
3. Markets

### Macroeconomics: Economic Performance and Growth

By Stephen Simpson Income is one of the most significant factors in measuring economic performance, and gross domestic product (GDP) is the most commonly used measure of a country's economic ...
4. Markets

### How To Calculate The GDP Of A Country

We explain how to calculate the GDP of a country using two different approaches.
5. Markets

### 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. Markets

### The World's Top 10 Economies

A look at the top 10 economies in the world.
7. Markets

### Explaining The World With Macroeconomic Analysis

Macroeconomists try to forecast economic conditions to help consumers, firms and governments make better decisions.
8. Markets

### How Is The GDP Of India Calculated?

India is a front-runner among developing economies. Investopedia explains how India calculates its GDP, an indicator of economic health and performance.
9. Markets

### How To Calculate The GDP Of A Country

A nationâ€™s gross domestic product measures the monetary value of all of the goods and services it produces.
10. Markets

### The Delicate Dance of Inflation and GDP

Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
RELATED FAQS
1. ### 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 >>
2. ### 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 >>
3. ### 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 >>
4. ### 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 >>
5. ### 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 >>
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. ### European Union - EU

A group of European countries that participates in the world economy as one economic unit and operates under one official ...
2. ### Sell-Off

The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
3. ### Brazil, Russia, India And China - BRIC

An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
4. ### Brexit

The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
5. ### Underweight

1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
6. ### Russell 3000 Index

A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...