What is real gross domestic product?

According to healthknowing, the real gross domestic product is a variant of the gross domestic product (GDP), which is independent of price fluctuations. The real gross domestic product can thus be described as the gross domestic product with constant prices.

In this lesson we explain the importance of the real domestic product, its calculation and significance. Finally, we give you the opportunity to check your knowledge with a few exercise questions.

What is the significance of the real gross domestic product?

In principle, the gross domestic product is a measure of the performance of an economy over a certain period of time and is therefore one of the most important key figures in national accounts.

A distinction is made between nominal and real gross domestic product. Real GDP is of great importance, since the economic growth of an economy can be derived from a comparison of the gross domestic products from two years via their percentage change.

Differentiation between nominal and real GDP

The value of the end products that flow into the gross domestic product is based on the prices that are achieved for them on the market.

Therefore, an increase in the gross domestic product can be attributed to two factors: either to a higher quantity of goods or services produced or to higher prices, as these increase the value of the end products. For this reason, a distinction is made between nominal and real gross domestic product.

The nominal gross domestic product always provides information about total production at current prices.

When calculating the real gross domestic product, on the other hand, a base year is selected first, the price level of which is then used as a reference for all other values. As a result, the price level remains constant with real GDP and it can happen that nominal GDP rises faster than real if the price level rises with stagnating or slower overall production.

GDP in inflation & deflation

Inflation

A different development of real and nominal GDP can be observed very well in the case of inflation and deflation. In the case of inflation, nominal GDP rises due to rising market prices.

real gross domestic product

Deflation

Deflation has the opposite effect: market prices fall and with them the nominal gross domestic product. The real gross domestic product does not change under the assumption of constant goods production.

Gross domestic product: differentiation between real and nominal GDP

Calculation of the real gross domestic product

The so-called “GDP deflator” is used to calculate real GDP. It is the quotient of nominal and real GDP and is used to measure the price development of the goods produced.

The GDP deflator is applied to nominal GDP to remove the influence of pure price increases. In contrast to the consumer price index, which uses a fixed and at the same time representative shopping basket, the weightings of the individual goods when determining the GDP deflator change from year to year.

 

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