# Calculating Real GDP

## Real GDP growth is the value of all goods produced in a given year; nominal GDP is value of all the goods taking price changes into account.

#### Key Points

• The following equation is used to calculate the GDP: GDP = C + I + G + (X - M) or GDP = private consumption + gross investment + government investment + government spending + (exports - imports).

• Nominal value changes due to shifts in quantity and price.

• In economics, real value is not influenced by changes in price, it is only impacted by changes in quantity. Real values measure the purchasing power net of any price changes over time.

• Real GDP accounts for inflation and deflation. It transforms the money-value measure, nominal GDP, into an index for quantity of total output.

#### Terms

• A measure of the economic production of a particular territory in financial capital terms over a specific time period.

• Without adjustment to remove the effects of inflation (in contrast to real).

#### Figures

1. ##### Real GDP Growth

This graph shows the real GDP growth over a specific period of time.

2. ##### Nominal GDP

This image shows the nominal GDP for a given year in the United States.

### Gross Domestic Product

The Gross domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time. The GDP is the officially recognized totals. The following equation is used to calculate the GDP:

$GDP = C + I + G + (X - M)$

Written out, the equation for calculating GDP is:

GDP = private consumption + gross investment + government investment + government spending + (exports - imports).

For the gross domestic product, "gross" means that the GDP measures production regardless of the various uses to which the product can be put. Production can be used for immediate consumption, for investment into fixed assets or inventories, or for replacing fixed assets that have depreciated. "Domestic" means that the measurement of GDP contains only products from within its borders.

### Nominal GDP

The nominal GDP is the value of all the final goods and services that an economy produced during a given year. It is calculated by using the prices that are current in the year in which the output is produced (Figure 2). In economics, a nominal value is expressed in monetary terms. For example, a nominal value can change due to shifts in quantity and price. The nominal GDP takes into account all of the changes that occurred for all goods and services produced during a given year. If prices change from one period to the next and the output does not change, the nominal GDP would change even though the output remained constant.

### Real GDP

The real GDP is the total value of all of the final goods and services that an economy produces during a given year, accounting for inflation (Figure 1). It is calculated using the prices of a selected base year. To calculate Real GDP, you must determine how much GDP has been changed by inflation since the base year, and divide out the inflation each year. Real GDP, therefore, accounts for the fact that if prices change but output doesn't, nominal GDP would change.

In economics, real value is not influenced by changes in price, it is only impacted by changes in quantity. Real values measure the purchasing power net of any price changes over time. The real GDP determines the purchasing power net of price changes for a given year. Real GDP accounts for inflation and deflation. It transforms the money-value measure, nominal GDP, into an index for quantity of total output.

#### Key Term Glossary

accounting
The development and use of a system for recording and analyzing the financial transactions and financial status of a business or other organization.
##### Appears in these related concepts:
consumption
In the expenditure approach, the amount of goods and services purchased for consumption by individuals.
##### Appears in these related concepts:
deflation
A decrease in the general price level, that is, in the nominal cost of goods and services.
##### Appears in these related concepts:
economics
The study of resource allocation, distribution and consumption; of capital and investment; and of management of the factors of production.
##### Appears in these related concepts:
export
Any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade.
##### Appears in these related concepts:
final good
Goods that are ultimately consumed rather than used in the production of another good.
##### Appears in these related concepts:
GDP
Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time.
##### Appears in these related concepts:
goods
That which is produced, then traded, bought, or sold, and finally consumed.
##### Appears in these related concepts:
government spending
Includes all government consumption, investment but excludes transfer payments made by a state.
##### Appears in these related concepts:
gross domestic product
A measure of the economic production of a particular territory in financial capital terms over a specific time period.
##### Appears in these related concepts:
Gross Domestic Product
A measure of the economic production of a particular territory in financial capital terms over a specific time period.
##### Appears in these related concepts:
index
A number representing a property or ratio, a coefficient.
##### Appears in these related concepts:
inflation
An increase in the general level of prices or in the cost of living.
##### Appears in these related concepts:
Inflation
The rise in the general level of prices of goods and services in an economy over a period of time.
##### Appears in these related concepts:
investment
A placement of capital in expectation of deriving income or profit from its use.
##### Appears in these related concepts:
market
one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labor) in exchange for money from buyers.
##### Appears in these related concepts:
monetary
Of, pertaining to, or consisting of money.
##### Appears in these related concepts:
money
A legally or socially binding conceptual contract of entitlement to wealth, void of intrinsic value, payable for all debts and taxes, and regulated in supply.
##### Appears in these related concepts:
nominal
Without adjustment to remove the effects of inflation (in contrast to real).
##### Appears in these related concepts:
nominal GDP
A macroeconomic measure of the value of the economy's output that is not adjusted for inflation.
##### Appears in these related concepts:
output
Production; quantity produced, created, or completed.
##### Appears in these related concepts:
Output
What is produced in the country, often measured by GDP.
##### Appears in these related concepts:
price
The cost required to gain possession of something.
##### Appears in these related concepts:
Price
The quantity of payment or compensation given by one party to another in return for goods or services.
##### Appears in these related concepts:
The amount of goods and services that can be bought with a unit of currency or by consumers.
##### Appears in these related concepts:
The amount of goods and services that can be bought with a unit of currency or by consumers.
##### Appears in these related concepts:
real
Having been adjusted to remove the effects of inflation; contrasted with nominal.
##### Appears in these related concepts:
real GDP
A macroeconomic measure of the value of the economy's output adjusted for price changes (inflation or deflation).
##### Appears in these related concepts:
value
The amount (of money or goods or services) that is considered to be a fair equivalent for something else.