|Book Edition||7th Edition|
What do economists mean by "real" in real gross domestic product?
The concept of real GDP
The real GDP of a country is an inflation-adjusted indicator of its economic performance over a year. GDP is mainly estimated using the expenditure method, with the formula GDP = C + G + I + NX (where C stands for consumption, G for government spending, I for investment, and NX for net exports).
The significance of calculating real GDP
Countries with higher GDPs produce more goods and services and, as a result, have a higher standard of living. As a result, many people and political leaders regard GDP growth as a key indicator of national progress, using the terms "economic growth" and "GDP growth" interchangeably. GDP allows policymakers and central banks to determine whether the economy is contracting or expanding, whether it requires stimulus or restraint, and whether a threat such as a recession or inflation is imminent. Real GDP is a better gauge of the shift in output levels from one time to the next since it accounts for inflation.
Kohli, U. (2004). Real GDP, real domestic income, and terms-of-trade changes. Journal of International Economics, 62(1), 83-106.
Hope it helps. Thank you.
What does 'real' mean in real GDP?
Real GDP measures the overall value of goods and services by estimating amounts but using inflation-adjusted constant rates. This is in contrast to nominal GDP, which does not take inflation into account. When adjusted for constant prices, it becomes a measure of "true" economic production that can be compared through time and countries.