What is the Real Gross Domestic Product?

James Doehring

A real gross domestic product is an inflation-adjusted measure of the total production of goods and services within the borders of a country. In other words, it measures the amount of common goods that can be bought, rather than the amount of money spent on goods. Gross domestic product is typically calculated using either the price of the goods or the incomes of the producers of the goods. The real gross domestic product can be used to compare total economic activity between two different time periods. Gross domestic product calculations are inherently limited in their accuracy because of transactions that tend to escape official records.

Inflation is one factor that can affect gross domestic product calculations.
Inflation is one factor that can affect gross domestic product calculations.

Inflation is one factor that can affect gross domestic product calculations. Inflation is the tendency for the value of money to go down over time due to an expansion of the total money supply, among other factors. It is typically measured by the price of basic household goods, such as bread. Though the same amount of money can purchase fewer goods over time, inflation tends to encourage citizens to spend money rather than hoard it, which promotes economic growth and increases gross domestic product.

It is typically convenient to measure wages, goods and other assets in terms of price. Under inflationary conditions, however, prices rise over time. It can therefore be difficult to meaningfully compare prices from different time periods. For this reason, when calculating real gross domestic product, real values adjusted for inflation are often used instead of nominal values. Real values are always given in terms of a base year, such as “2010 US Dollars”; attaching a base year indicates that the value of money refers to the economic conditions of that year. Real gross domestic product figures always specify the year to which the currency refers.

The gross domestic product is one economic activity that is measured in terms of price. It can be calculated by adding up the prices of all items produced, all items purchased, or all incomes within a country. It is important to distinguish where production took place because the real gross domestic product only includes production within the political boundaries of a country. The real gross domestic product is typically used to gauge the total strength of an economy independent for comparison between different years.

The real gross domestic product never fully describes the economic transactions within a country. A variety of transactions go unnoticed because they are not regulated in the legal market. Many services, such as housekeeping and babysitting, are not reported for tax purposes and therefore escape official statistics. Illegal transactions, likewise, are very difficult to measure. Another undetected activity is bartering, or direct trade of goods themselves.

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