What is real GDP? Definition, formula, significance - Business Insider

Both consider the same factors. The key difference: Nominal GDP reports the numbers using current dollar values. So it reflects both price increases and output increases. Real GDP just measures actual increases in output — it accounts for inflation or deflation, stripping away any price changes.Real GDP is considered by economists to be a more accurate measure of economic output than nominal GDP.

Nominal GDP is a sufficient measure if used within a year, as it reports growth with that year's prices. However, when it comes to comparing growth from one year to the next, real GDP is a better metric. Because it uses current dollar values, nominal GDP is usually higher than real GDP — at least, if an economy is expanding and prices are going up. But the reverse is true inthat includes deflation. Both growth and prices would be down, resulting in nominal GDP being lower than real GDP.

In a growing economy with increasing prices, one can think of nominal GDP as an inflated number. In the reverse scenario, it is a deflated number.How to calculate real GDPThe GDP deflator is provided by the BEA and measures inflation or deflation as a percent change from a base year, which is currently 2012. As of Q2, 2020, the GDP deflator is 112.87.

We can use an example from the end of 2019. The nominal GDP in the US at the end of 2019 was $21.7 trillion and the GDP deflator was 112.950. To determine real GDP, we calculate it as follows:The BEA publishes real GDP figures quarterly. And they invoke several types of responses.

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