Connect with us

How To

How to calculate the real Gross Domestic Product?

How to calculate the real Gross Domestic Product?

Financial studies in terms of national productivity may be complicated, but provide a good understanding of how well or badly the economy is doing.

Traditionally, the GDP includes the total production of goods and the value of services combined within a particular time frame like a particular year or a quarter. Comparing the GDP across successive years would indicate the rise or fall of production and services.

In order to calculate the GDP, you need to add up personal expenditures with the business investment and government spending along with exports minus imports. The ideal growth rate of GDP may be 2 or 3 percent.

The complexities of GDP

Instead of considering the facts and figures as mere words or digits on paper, consider the realities and the complexities. Depending upon the size of the economy and the population and the area of the country in question, GDP could run into trillions of dollars. Practically, GDP helps through comparisons of industry sizes and incomes, and analysis would reveal which countries are faring well or poorly and in which sector. Further, GDP per capita would reveal the extent of the individual contribution to the GDP. In America, the GDP per capita remains in excess of $50,000 in a year, while some poor countries may have a fraction of that amount.

However, it is not so simple since it is possible to differentiate between the nominal GDP and the Real GDP, resulting in a more accurate diagnosis of the state of the economy.

The difference between the nominal and the Real GDP

The nominal GDP is the raw total of goods and services that considers price changes with no adjustments towards inflation or deflation. Obviously, it is not a realistic estimate but nominal GDP is higher than the real GDP. For purposes of evaluation and analysis, it would be better to have access to both the nominal GDP and the real GFDP figures.

Financial studies in terms of national productivity may be complicated, but provide a good understanding of how well or badly the economy is doing.

How to calculate the real GDP?

Real GDP is far more effective in providing a true picture of the health of the economy and enabling comparisons across countries and changing times. Comparisons across quarters or years indicate whether the economy is growing or declining with the real GDP. The effects of inflation or deflation are considered while calculating the real GDP.  What is the formula for calculating the real GDP? The real GDP is reached by dividing the nominal GDP by the deflator.

  • Prices and growth are included in the nominal GDP
  • The real GDP reflects merely pure growth
  • The real GDP formula would be an advantage

Which is better, nominal or real GDP?

Real GDP projects a more reasonable assessment of the economic growth or the decline. Since the real GDP adjusts the impact of inflation or deflation, it appears as if the prices remained constant without increase or decrease. The higher figure of nominal GDP does create the impression that the country is performing better, economically speaking.

The importance of gross national product

In order to reach a better understanding of national productivity, it is simpler to consider the total goods and services produced by a country’s population, whether at home or abroad. How would GNP be different from GDP? Not so different really in principle, but institutions like the World Bank consider GNP.

Editorial & Advertiser disclosure
Our website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.
Global Banking and Finance Review Awards Nominations 2021
2021 Awards now open. Click Here to Nominate

Recommended

Newsletters with Secrets & Analysis. Subscribe Now