Real GDP

Real GDP

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Encyclopedia
Real Gross Domestic Product (GDP) is a macroeconomic measure of the value of output
Output (economics)
Output in economics is the "quantity of goods or services produced in a given time period, by a firm, industry, or country," whether consumed or used for further production.The concept of national output is absolutely essential in the field of macroeconomics...

 economy adjusted for price changes (that is, inflation or deflation). The adjustment transforms the money-value measure, called nominal GDP, into an index
Index (economics)
In economics and finance, an index is a statistical measure of changes in a representative group of individual data points. These data may be derived from any number of sources, including company performance, prices, productivity, and employment. Economic indices track economic health from...

 for quantity of total output. Nominal gross domestic product is defined as the market value
Market value
Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...

 of all final goods and services
Goods and services
In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility. It is often used when referring to a Goods and Services Tax....

 produced in a geographical region, usually a country. That market value depends on two things: the actual quantities of goods and services produced, and their respective prices (referred in lower case below). The relation between the nominal and real values is given the following definitional relation:
GDP = Real GDP x Price


where GDP stands for nominal GDP and Price stands for the price index
Price index
A price index is a normalized average of prices for a given class of goods or services in a given region, during a given interval of time...

 of GDP.

Real GDP is a prime example of the distinction between real vs. nominal values in economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

.

If adequate price and quantity data are known, GDP can be found by:
GDP = ∑ ptqt
Where p are prices, q are quantities, and t indicates the current year.


Then real GDP can be found by substituting the current-year prices with the prices in some base year.
Real GDP = ∑ pbqt
Where b denotes the base years.


If a set of real GDPs from various years are calculated, each using the quantities from its own year, but all using the prices from the same base year, the differences in those real GDPs will reflect only differences in volume.

An index called the GDP deflator
GDP deflator
In economics, the GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy...

 can be obtained by dividing, for each year, the GDP by the real GDP. It gives an indication of the overall level of price change (inflation or deflation) in the economy.
GDP deflator for year t  =  GDPt  /  Real GDPt


Nomenclature
Nomenclature
Nomenclature is a term that applies to either a list of names or terms, or to the system of principles, procedures and terms related to naming - which is the assigning of a word or phrase to a particular object or property...

:
"GDP" may refer to "nominal" or "current" or "historical" GDP, to distinguish it from the real GDP. The real GDP is sometimes called "constant" GDP because it is expressed in terms of constant prices. Depending on context, "GDP" may also refer to real GDP,
Real GDP growth on an annual basis is the nominal and abnormal GDP growth rate adjusted for inflation and expressed as a percentage.
Because Real GDP is adjusted for changes in prices and inflation throughout the year, it can be thought of in terms of 'purchasing power
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...

'. As a result, individual purchasing power can be measured by Real GDP per capita
Per capita
Per capita is a Latin prepositional phrase: per and capita . The phrase thus means "by heads" or "for each head", i.e. per individual or per person...

, i.e., real GDP divided by the size of the population.

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