Glossary

Real GDP

Real GDP is GDP with the effect of rising prices taken out, so you can tell whether a country actually produced more goods and services this year or simply charged higher prices for the same amount. Think about a part-time job: if your hourly wage doubled but rent and groceries also doubled, you are no better off. Real GDP applies that same correction to a whole economy — it asks how much output grew once you hold prices fixed.

More precisely, real GDP values output at the prices of a chosen base year, rather than at current prices. Output measured at current prices is called nominal GDP. Because nominal GDP rises both when an economy produces more and when prices climb, it can overstate growth during periods of inflation. To convert nominal to real, you divide by a price index that tracks the overall price level — for GDP, that index is the GDP deflator. When economists say an economy grew 3 percent, they almost always mean real GDP growth.

\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Price index}} \times 100

Deflating nominal GDP

Divide nominal GDP by a price index (which equals 100 in the base year) and multiply by 100. The result expresses this year's output in base-year dollars, so any change reflects real output rather than price changes.

Nominal GDP: Output valued at current-year prices, with no adjustment for inflation. It rises when output grows or when prices rise, so it can overstate real growth.
GDP deflator: The price index used to convert nominal GDP into real GDP. It equals $\frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$ and covers every good in GDP, making it broader than the CPI.
Economic growth: The percentage increase in real GDP over time — the standard headline measure of whether an economy is expanding.
Base year: The reference year whose prices are held fixed when computing real GDP. In the base year, nominal GDP and real GDP are equal and the price index equals 100.