Econ: Real GDP

To measure economic growth, we measure increases in the quantity of goods and services produced in the economy from one period of time to another. Economic growth is measured as a percentage increase in real GDP or real GDP per capita over time. Real GDP tends to fluctuate from quarter to quarter, undergoing systematic changes known as the business cycle.

We call GDP which has been adjusted for price changes real GDP; if it isn’t adjusted for price changes, we call it nominal GDP. To compute real GDP in a given year, use the following formula:

Real GDP

Suppose we wish to calculate the real GDP for the year 2001 in terms of 1996 dollars. The value for 1996 price deflator is 100 and the 2001 price deflator is 115. The 2001 GDP in nominal terms is $10 trillion dollars. Then:

Real GDP year 2001 in 1996 dollars = $10 trillion / 115  x  100 = $8.6 trillion 



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