# What Real Gross Domestic Product (Real GDP) Is, How to Calculate It, vs. Nominal

## What Is 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. Real GDP is expressed in base-year prices. It is often referred to as constant-price GDP, inflation-corrected GDP, or constant-dollar GDP. Put simply, real GDP measures the total economic output of a country and is adjusted for changes in price.

### Key Takeaways

• Real gross domestic product is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.
• It is expressed in base-year prices and is often referred to as constant price, inflation-corrected, or constant dollar GDP.
• Real GDP makes comparing GDP more meaningful because it shows comparisons for both the quantity and value of goods and services.
• Real GDP is calculated by dividing nominal GDP by a GDP deflator.
• Unlike real GDP, nominal GDP uses current market prices and doesn't factor inflation into its calculation.
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## 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 price changes, Essentially, it measures a country's total economic output, taking price changes into account—whether they are due to inflation or deflation.

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. To determine real GDP, economists take nominal GDP and adjust it for price changes.

The Bureau of Economic Analysis (BEA) provides a quarterly report on GDP 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.

### 1.3%

The U.S. real GDP growth rate (annualized) during the first quarter of 2023, versus a 2.6% increase in the fourth quarter of 2022.

### 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).

\begin{aligned}&\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{R}}\\&\textbf{where:}\\&\text{GDP}=\text{Gross domestic product}\\&\text{R} =\text{GDP deflator}\end{aligned}

The BEA provides the deflator on a quarterly basis. The GDP deflator is a measurement of inflation since a base year (currently 2017 for the BEA). Dividing the nominal GDP by the deflator removes the effects of inflation.

## 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, which 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).

## Why Is Real GDP More Accurate Than Nominal GDP?

Real GDP is considered to be more accurate than nominal GDP because it factors inflation (or price changes) into its calculation. As such, it measures the total health of the economy. Nominal GDP, on the other hand, doesn't necessarily provide an accurate picture of the economy or where it's headed. That's because it factors current market prices into its calculation. This means that it can only be used as a comparative metric to others that aren't adjusted for inflation.

## 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, as it does not account for the informal economy, does not count care work or domestic labor in the home, ignores business-to-business activity, and counts costs and wastes as economic activity, among other shortcomings.

## The Bottom Line

Real GDP is an economic metric that is used to describe the economic output of a country within a specific year. It reflects the value of all goods and services produced while factoring inflation into its calculation. You may often hear it referred to by other names, such as constant-price GDP or inflation-corrected GDP. This is in contrast to nominal GDP. This metric uses current prices to measure the output for goods and services.

Article Sources
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1. U.S. Bureau of Economic Analysis. "Gross Domestic Product."

2. U.S. Bureau of Economic Analysis. "What Are Current-Dollar Estimates?"

3. U.S. Bureau of Economic Analysis. "Gross Domestic Product (Second Estimate), Corporate Profits (Preliminary Estimate), First Quarter 2023."

4. U.S. Bureau of Economic Analysis. "GDP Price Deflator."

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