How is real GDP calculated?

Real GDP, or Gross Domestic Product, is a measure of the total value of all final goods and services produced within an economy over a specific period of time, adjusted for inflation. It is used to gauge the economic performance and growth of a country.

To calculate real GDP, the following steps are typically followed:

1. Select a base year: A base year is chosen as a reference point for comparison. It is usually a recent year with stable economic conditions.

2. Gather data: Collect data on the quantities and prices of all goods and services produced in the economy for the current year and the base year. This data is usually obtained from various sources such as government reports, surveys, and statistical agencies.

3. Calculate nominal GDP: Nominal GDP is the total value of goods and services produced in current prices without adjusting for inflation. It is calculated by multiplying the quantity of each good or service produced by its respective price and summing up all the values.

4. Calculate the GDP deflator: The GDP deflator is a measure of inflation and is used to adjust nominal GDP to real GDP. It is calculated by dividing nominal GDP by real GDP and multiplying by 100. The formula is: GDP deflator = (Nominal GDP / Real GDP) * 100.

5. Calculate real GDP: Real GDP is obtained by dividing nominal GDP by the GDP deflator and multiplying by 100. The formula is: Real GDP = (Nominal GDP / GDP deflator) * 100.

By using this formula, real GDP accounts for changes in prices over time, allowing for a more accurate comparison of economic output between different years. It provides a measure of economic growth that is adjusted for inflation, enabling policymakers, economists, and analysts to assess the true changes in the production of goods and services within an economy.