How To Calculate Real GDP Growth Rate (With Formula)
Definition of Real Gross Domestic Product Growth Rate (Real GDP Growth Rate)
The Real Gross Domestic Product Growth Rate (Real GDP Growth Rate) measures the growth of the inflation-adjusted measure of the value of all final goods and services produced in a defined geographical area.
In other words, the real GDP growth rate is the growth of real GDP value from one period to another.
Definition of Real Gross Domestic Product (Real GDP)
Real Gross Domestic Product (Real GDP) means the inflation-adjusted measure of the value of all final goods and services produced in a defined geographical area. This is also referred to as constant-price GDP, inflation-corrected GDP, or constant dollar GDP.
As an example, the real gross domestic product (GDP) of the United States increased at an annual rate of 2.3 percent in the third quarter of 2021 (source: bea.gov).
In the United States, the Bureau of Economic Analysis (BEA) provides the statistics such as the American GDP rate on a quarterly basis as well as yearly basis.
How To Calculate Growth Rate of Real GDP
Step 01:
Calculate the Nominal GDP. The formula provided below,
Nominal GDP = C + I + G + ( X – M )
Step 02:
Calculate the Real GDP. The formula provided below,
Real GDP = ( Nominal GDP / Deflator ) x 100
GDP Deflator measures the impact of inflation on the GDP of an economy during a given period. This helps to eliminate the inflation from nominal GDP.
Step 03:
Calculate the Real GDP Growth Rate. The formula provided below,
Real GDP Growth Rate = [ ( GDP present – GDP past ) / GDP past ] x 100
This is the comparison between the GDP values of two timespans, which reflects the growth rate.
Why Real GDP is Important?
Nominal gross domestic product (GDP) calculates the value of all economic outputs produced by a defined area (ex: a country. island, or state) on a measured time duration (ex: year, quarter). The nominal GDP figure depends on inflation, which is the pace of the price raise of goods or services produced. As an example, if inflation is high in a country, the nominal GDP will also be higher. Hence, the growth rate of the nominal GDP does not accurately show the real economic growth of the country/state due to inflation.
Real GDP adjusts the inflation from the GDP, where it eliminates the effect of the inflation. Real GDP is used by governments, corporates, economists, and capital markets professionals to analyze economic information.
Nominal GDP is usually higher than Real GDP because inflation is a figure which is generally positive.
Learn More About Growth Rate:
