Real GDP Formula

Real GDP Formula (Table of Contents)

• Formula
• Examples
• Calculator

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 inflation-adjusted gross domestic product. It uses constant base-year 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 inflation-adjusted 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 non-profit institutions. This includes the consumption of durable, semi-durable and non-durable 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.

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

1. Formula For GDP Deflator
2. How to Calculate Nominal GDP using Formula
3. Examples of National Income Formula
4. Calculator For Money Multiplier Formula