The real
GDP is a
quarterly statistic published by
central banks. It represents the
real, as opposed to
nominal, value of the
economy’s current
output. This means it takes out the effect of
inflation and thus allows us to focus on
production. It is the most used
economic indicator. When you see in the
newspaper that
GDP grew by 3% in the second quarter, they are talking about real
GDP.
Real
GDP is used to track the
business cycle, forecast
GDP in coming
quarters, allow international comparisons of
economic performance, and compare the
economic richness of different nations.
Real
GDP =
nominal GDP valued in the
prices of the
base year. Basically, this means you take the total amount of all
goods and
services produced and multiply them by their
prices during the
base year.
The limitations of
Real GDP as a measure are numerous. First of all, like
nominal GDP, it assigns no value to
household production (goods produced in homes and not formally sold) or the
underground economy. Also, the
GDP of a nation doesn’t take into account things like
personal security,
environmental cleanliness, or
democracy. Lastly, it can give inaccurate results for international comparisons since the prices of identical commodities in different countries can be dramatically different.