Real GDP
What is Real GDP?
Real GDP is the value of all final goods and services produced in a given year, evaluated at base-year prices to remove the effects of inflation.
It measures actual changes in output by holding prices constant, allowing for accurate comparisons of economic growth over time. Real GDP is the preferred measure for analyzing long-term economic trends and productivity.
Real GDP: a worked example
Picture an economy whose entire output is textbooks and bus rides. In the base year, Year 1, it produces 2,000 textbooks at $50 and 100,000 bus rides at $2, so nominal and real GDP both equal $100,000 + $200,000 = $300,000. In Year 2 it produces 2,200 textbooks at $55 and 110,000 bus rides at $2.20. Nominal GDP is 2,200 × $55 + 110,000 × $2.20 = $121,000 + $242,000 = $363,000. Real GDP values Year 2 quantities at Year 1 prices: 2,200 × $50 + 110,000 × $2 = $110,000 + $220,000 = $330,000. Output grew ($330,000 - $300,000) / $300,000 × 100 = 10 percent, while nominal GDP grew 21 percent. Dividing nominal by real gives a deflator of ($363,000 / $330,000) × 100 = 110, so prices rose 10 percent as well.
The mistake students make with real gdp
Real growth gets computed by subtracting inflation from nominal growth, so 21 percent nominal minus 10 percent inflation is written down as 11 percent real. The shortcut is an approximation that drifts wider as the rates get bigger, because growth compounds rather than adds. Divide the ratios instead: 1.21 / 1.10 = 1.10, which is 10 percent real growth, not 11. At rates of a few percent the subtraction is close enough for a quick sanity check, but when a question hands you the actual figures, do the division.
Real GDP questions
Why do economists use real GDP instead of nominal GDP?
Real GDP isolates changes in the quantity of output by valuing every year at one fixed set of base year prices. Comparing two years of nominal GDP blends price changes and quantity changes together, so a country can post a large nominal gain in a year when its factories actually produced less. Growth rates, recession dating and productivity comparisons all rest on real GDP for that reason. Nominal GDP still answers questions about the size of the money economy right now.
Does real GDP equal nominal GDP in the base year?
Real GDP and nominal GDP are identical in the base year, since the prices used to value output are that year's own prices. The GDP deflator therefore reads exactly 100 there. Move one year forward and the two separate, with nominal GDP using new prices while real GDP keeps the old ones. Checking that the base year figures match is a fast way to catch an arithmetic slip in a multi year table.
How do you calculate the real GDP growth rate?
Subtract the earlier year's real GDP from the later year's, divide by the earlier year's real GDP, then multiply by 100. Real GDP rising from $330,000 to $346,500 gives ($346,500 - $330,000) / $330,000 × 100 = 5 percent. Using real figures at both ends is what makes the answer a measure of extra output rather than higher prices. Growth per person needs one more step, dividing each year's real GDP by that year's population first.
Formula / Example
Related terms
Common comparisons
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated