What is real GDP and what is the importance of it? Real Gross Domestic Product (real GDP) is a macroeconomic measure of the value of economic output adjusted for price changes (i.e., inflation or deflation). This adjustment transforms the money-value measure, nominal GDP, into an index for quantity of total output.
GDP is the sum of consumer spending, Investment made by industry, Excess of Exports over Imports and Government Spending. Due to inflation GDP increases and does not actually reflect the true growth in economy. That is why inflation rate must be subtracted from the GDP to get the real growth percentage called the real GDP.
Real GDP is an example of the distinction between real vs. nominal values in economics. Nominal gross domestic product is defined as the market value of all final goods produced in a geographical region, usually a country. Real gross domestic product accounts for price changes that may occur due to inflation. To adjust for price changes, real GDP is calculated using prices from a specific year, the base year. This allows real GDP to measure changes in outputand separate from changes in prices.
An index called the GDP deflator can be obtained by dividing, for each year, the nominal GDP by the real GDP, so that the GDP deflator for the base year will be 1. It gives an indication of the overall level of price change (inflation or deflation) in the economy.
Real GDP growth on an annual basis is the nominal GDP growth rate adjusted for inflation. Real gross domestic product (GDP) represents the method by which economists assess growth in a country's economy. Real GDP growth can be affected by various factors but there are some primary drivers of this type of expansion in an economy. Consumer spending can be a significant driver of this economic barometer. Other factors that influence GDP include the pace at which businesses and government agencies spend money. Economists heavily consider consumer spending when assessing growth in regional economies. In some countries, personal consumption, which represents consumer spending, is the largest consideration in determining real GDP growth.
International trade also affects a nation's economic stability. The greater the export activity, the more business the country is receiving from other countries. When export activity is rising, it is likely to drive real GDP growth in that region. International trade demand is measured across various industries, including retail and manufacturing. During periods when international trade demand is increasing, any weaknesses in a local economy can become less influential and economic expansion may still occur. If the rate of imports is outpacing exports, however, the increases in international commerce can are likely to be less effective.
A government agency's ability and desire to spend money toward improving economic conditions in a country feeds into real GDP growth. Often, a government will take the role of funding projects, such as infrastructure development, that the private sector does not typically finance. A government may also spend large sums of money on defense items for the military in a country. All of these activities may have a strengthening affect on an economy.
1.Mercylyne i. Juma., “The Effect of Macro-economic Variables on Growth”,
2.Real Gross Domestic Product, http://en.wikipedia.org/wiki/Real_gross_domestic_product.