Real GDP Formula (Table of Contents)
What is Real GDP Formula?
Real GDP measures the economic output of a country which accounts for the effects of inflation and deflation. Real GDP provides a more realistic assessment of the economy than the Nominal GDP. If real GDP is not considered then it would look like the country is producing more when the prices are gone up
It is also known as an inflationadjusted gross domestic product. It uses constant baseyear prices for measuring the value of final goods and services
Formula For Real GDP is represented as,
Where,
Nominal GDP is calculated as
Nominal GDP = Consumption + Investment + Government Spending + Net Exports
Examples of Real GDP Formula (With Excel Template)
Let’s take an example to understand the calculation of Real GDP in a better manner.
Real GDP Formula – Example #1
Let us look at an example to calculate the real GDP using a sample of a basket of products
Solution :
Nominal GDP is calculated as:
 Vegetables = ($10 * 200) + ($11 * 220) + ($13 * 230) = $7410
 Juice = ($8 * 130) + ($10 * 110) + ($11 * 90) = $3130
 Cheese = ($5 * 50) + ($6 * 40) + ($7 * 50) = $840
 Milk = ($12 * 20) + ($13 * 22) + ($15 * 26) = $916
 Fruits = ($15 * 25) + ($16 * 30) + ($19 * 35) = $1520
Real GDP is calculated as
Real GDP is calculated by using 2016 as Base Year
 Vegetables = ($10 * 200) + ($10 * 220) + ($10 * 230) = $6500
 Juice = ($8 * 130) + ($8 * 110) + ($8 * 90) = $2640
 Cheese = ($5 * 50) + ($5 * 40) + ($5 * 50) = $700
 Milk = ($12 * 20) + ($12 * 22) + ($12 * 26) = $816
 Fruits = ($15 * 25) + ($15 * 30) + ($15 * 35) = $1350
As you can see in the table above, the real GDP is lower than the nominal GDP. This is because the nominal GDP includes inflation. To calculate the GDP deflator, divide the nominal GDP to real GDP
Deflator is calculated using the formula given below
Deflator = Nominal GDP / Real GDP
 Vegetables = $7410 / $6500 = 1.14
 Juice = $3130 / 2640 = 1.19
 Cheese = $840 / $700 = 1.20
 Milk = $916 / $816 = 1.12
 Fruits = $1520 / $1350 = 1.13
Real GDP Formula – Example #2
Assume that the nominal GDP of the US was $11 trillion and in the year 2017 was $11 trillion and the inflation rate was 10%. Calculate the real GDP.
Solution:
The inflation rate is 10% a year making the deflator to be 1.1.
Real GDP is calculated using the formula given below
Real GDP = Nominal GDP / Deflator
 Real GDP = $11 trillion / 1.1
 Real GDP = $10 trillion
Only due to inflation it can be seen that the nominal GDP was up by 10%. Using the real GDP formula we have found that the inflationadjusted GDP is $10 trillion
Real GDP Formula – Example #3
Calculate the Real GDP and Growth Rate of Real GDP and Nominal GDP using the following information
Solution:
For all the years except for the base year, we will now calculate the GDP deflator. The GDP deflator is the number that when divided into nominal GDP and multiplied by 100, yields the real GDP for that year
Deflator is Calculated by taking 1994 as Base Year
Deflator is calculated using the formula given below
Deflator = [(Value of Basket Current Year)/( Value of Basket Base Year)]*100
For 1965,
 Deflator = [($260,000) / ($1,000,000)] * 100
 Deflator = 26
For 2001
 Deflator = [($1,085,100) / ($1,000,000)] * 100
 Deflator = 108.51
We can now calculate real GDP for every year in 1994 dollars. Note that real GDP for the base year is equal to the nominal GDP for that year.
Real GDP is calculated using the formula given below
Real GDP = (Nominal GDP / Deflator) * 100
For 1994
Real GDP for the base year is equal to the nominal GDP for that year
 Real GDP = $8 trillion
For 1965
 Real GDP = ($1 trillion / 26) * 100
 Real GDP = $3.85 trillion
For 2001
 Real GDP = ($10 trillion / 108.51) * 100
 Real GDP = $9.216 trillion
Growth Rate of Nominal GDP is calculated as:
 Growth Rate of Nominal GDP = [($10 trillion – $1 trillion)/ $1 trillion]*100%
 Growth Rate of Nominal GDP = 900%
Growth Rate of Real GDP is calculated as:
 Growth Rate of Real GDP = [($9.216 trillion – $3.85 trillion)/ $3.85 trillion]*100
 Growth Rate of Real GDP = 140%
Explanation
The GDP formula of factors like investment, consumption, public expenditure by government and net exports
 Investment: Investment means additions to the physical stock. The investment includes everything including the construction of housing societies, offices, factories and an increase in the inventories of goods. The gross investment includes depreciation
 Consumption: This consumption includes money spent on goods and services by private households and nonprofit institutions. This includes the consumption of durable, semidurable and nondurable goods and services. This private consumption includes expenditures on all these categories of goods and services
 Government Purchases of goods and services: This factor includes all the spending of government on goods and services. This also includes all the salary and wages paid by the government
 Net Exports: It shows the difference between imports and exports. The difference between exports and imports is net exports
Relevance and Uses of Real GDP Formula
Real GDP is mainly used to calculate economic growth. The GDP growth rate is calculated by using percentage change. Real GDP is used to calculate real growth not just increasing wages and increase in price.
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GDP mainly is important for investors to reallocate the asset allocation of their portfolios. During this, they also compare the GDP with other countries. Countries with higher growth numbers attract strong investors for the stocks, bonds and also for sovereign debt
Real GDP rates are also used by the Fed when deciding for increasing or decreasing the interest rate. Fed generally increases the rate when the growth is fast and decreases the rate when the growth is low. Real GDP tells how much the country is actually producing. Real GDP is comparable and can be compared to countries across
Real GDP Formula Calculator
You can use the following Real GDP Formula Calculator
Nominal GDP  
Deflator  
Real GDP  
Real GDP  = 


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