The constant dollar GDP is a way of measuring the gross domestic product in terms of inflation-adjusted dollars. This is important because the value of currency changes over the years. In order to truly understand a country's GDP, it is important to establish a benchmark year. The constant dollar GDP is sometimes called the real GDP or inflation-corrected GDP.

The constant dollar GDP's opposite is the nominal GDP. The nominal GDP measures the gross domestic product, the value of all goods and services produced in a country, in the value of the currency for that particular year. While this may provide valuable information about a country's economic condition over a short time frame, it provides very little usable information for comparison over time because it does not take into account the effects of inflation.

This is why the constant dollar GDP is so important. The first step in determining the constant dollar GDP is to determine a baseline year. This will be the easiest year for which to determine the constant dollar GDP because it will be the same as the nominal GDP. From there, all other years included in the study will require an adjustment.

For example, if the GDP for a country in 2005 were $10 billion US Dollars (USD), and inflation were 5 percent in 2006, then the next year's figure would have to take that into account. If, in 2006, the nominal GDP were $11 billion USD, at first glance it would seem like an increase of 10 percent. However, if inflation increased by 5 percent, that would require an adjustment. So, the real GDP for 2006 would be $10,450,000,000 (USD), which is 5 percent of $11 billion. Therefore, the constant dollar GDP is determined to have only increased 4.5 percent.

The baseline year chosen is often near the middle of the data set being considered. For example, if comparing the constant dollar GDP for years between 1980 and 2000, the year 1990 may be chosen as the baseline. While this is common practice, there is no set rule for choosing a baseline year.

The constant dollar GDP can often indicate if the standard of living in a country has improved over time. The theory is that if the country has an increased level of economic production, its citizens will naturally benefit. Conversely, if the country has a contraction in economic activity, its citizens are likely to experience harmful effects. This is a generalization that may not be true in all cases.