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 calculated by taking the nominal GDP and adjusting it for changes in the overall price level, in order to account for inflation or deflation.

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

1. Determine the base year: A base year is chosen as a reference point to compare the current year's prices with. It is usually a year of relative stability in terms of prices.

2. Obtain the nominal GDP: Nominal GDP is the total value of all final goods and services produced within an economy, measured at current market prices. It is calculated by summing up the current year's quantities of goods and services produced, multiplied by their respective current market prices.

3. Calculate the GDP deflator: The GDP deflator is a measure of the overall price level in an economy. It is calculated by dividing the nominal GDP by the real GDP and multiplying by 100. The formula for the GDP deflator is: GDP deflator = (Nominal GDP / Real GDP) * 100.

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

By adjusting the nominal GDP for changes in the price level using the GDP deflator, real GDP provides a more accurate measure of economic output, as it removes the impact of inflation or deflation. This allows for meaningful comparisons of economic performance over time, as it reflects changes in the quantity of goods and services produced, rather than changes in prices.