Real GDP

About the calculation

Real GDP is the nominal (or unadjusted number for GDP) adjusted to reflect the change in prices (or inflation) over the period. Once inflation is calculated as the percentage change in the CPI, the nominal GDP number for year 2 is divideded by (1 + the inflation rate). The Real GDP for year 2 can then be compared to the GDP number for year 1 to determine if there has been any growth in real GDP in the economy.

Real GDP is always calculated relative to a base year, typically the year before, in order to enable a calculation of economic growth.

Real GDP Year 2 = Nominal GDP Yr 2 / (1 + inflation)
Inflation = (CPI Yr 2 - CPI Yr 1)/ CPI Year 1 (i.e. % change in CPI)

For example, if nominal GDP in Year 1 was 100 and in Year 2 was 105 we need to have information about inflation in order to calculate what Real GDP is for Year 2. The inflation rate may be given in the question (for example, inflation is 2%), or the question can provide the CPI numbers and the student has to determine inflation (for example, CPI Year 1 100, CPI Year 2 102). In our example, to calculate real GDP for Year 2:

Inflation = % change CPI
          = 102 - 100) / 100
          = 2%
		  
Real Yr 2 = Nominal Yr 2 / ( 1 + inflation)
          = 105 / (1 + 0.02)
          = 105 / 1.02
          = 102.9

Real GDP can also be calculated using an approach referred to as the GDP deflator. In this method, one does not calculate the inflation rate, and use that as part of the denominator, but instead you directly use the two CPI numbers as follows below. Importantly, mathematically the result is the same.

Real GDP Year 2 = Nominal GDP Yr 2 x GDP deflator
Real GDP Year 2 = Nominal GDP Yr 2 x (CPI Yr 1/CPI Yr 2)

How is it examined?

Information is provided for nominal for two or more years, and information is provided from which students can determine inflation. Students are then required to calculate Real GDP for a given year. Importantly, the question will indicate what the base year is for the calculation - if there are only two years information, the base year will be the first year. If there are more than three years, students need to be careful to determine what the question is asking in terms of the year to use as the base year for the calculation of real GDP.

What students get wrong

Common errors include:

  • not knowing the formula
  • incorrecly calculating inflation, especially if CPI in the base year is not 100

Practice calculator

Enter numbers in the grey boxes and the yellow result will calculate.


GDP Year 1

GDP Year 2

CPI Year 1

CPI Year 2
Real GDP Year 2