Real GDP is a much better index for expressing the output of an economy, as it takes into account the fluctuating value of goods and services when expressed in monetary terms. It therefore gives economists a better idea of the total national output of a country, with reduced distortion due to economic factors such as inflation and currency rate fluctuations.
What is Real GDP?
Real GDP is a way of expressing GDP (Gross Domestic Product) based on a fixed unit of value. In most cases this takes the form of the value of a unit of currency in a given year. An example of real GDP would be expressing the GDP of a country between 2000 and 2010 exclusively in 2000 dollars. In order to calculate this real GDP figure for each year, the nominal GDP of the country (its national output) must be multiplied by a factor known as the GDP Price Deflator that is equal to the relative rise in prices of goods and services (inflation) over this period of time.
Real GDP Comparisons
The reason why real GDP is a superior method of expressing national economic performance can be easily illustrated. Take for example a hypothetical country which in the year 2000 had a nominal GDP of $100 Billion, while by 2010 its nominal GDP was measured at $150 billion. Over the same period of time, inflation reduced the relative value of the dollar by 50%. Looking at merely nominal GDP, the economy appears to be performing well, whereas the real GDP expressed in 2000 dollars would be $75 billion, revealing that in fact an overall decline in economic performance occurred. It is due to this greater accuracy that real GDP is favored by economists as a method of measuring economic performance.