Real GDP is said to be the value of all goods and services determined in an economy after taking into account the rate of inflation.
In other words, it is the inflation adjusted value of goods and services produced in an economy in a year; therefore it is also known as inflation adjusted gross domestic product.
Real GDP in addition to inflation, also takes into account the deflation. Real GDP is, therefore, a more accurate measure of the economy than the other measures, such as Nominal GDP (which measures total output based on the prices).
The Real GDP formula can be represented as
Real GDP = Nominal GDP / Deflator
or R = N / D
N or Nominal GDP = C + I + G + (X − M)
D or Deflator = Nominal GDP / Real GDP
C = Consumption
I = Investment
G = Government spending
X = Exports
M = Imports
Advantages of Real GDP
- It allows comparison of GDP by year as it takes inflation into consideration
- It is a good measure of the state of the economy in a business cycle
- Real GDP helps economies prepare for making good financial decisions or for recessions
This completes the topic on the Real GDP Formula, which plays an important role in determining the actual GDP in an economy. For learning more of such interesting concepts on Economics for Class 12, stay tuned to BYJU’S.