How to Calculate Real GDP

by Joshua Levenson; Updated September 26, 2017
The value of money is heavily influenced by real GDP.

A country's economic productivity can be evaluated through a measurement called Gross Domestic Product. Gross Domestic Product, or GDP, is looked at as a monetary aggregation of all the economic activity in a country. Increasingly, large GDP numbers are usually looked at as favorable and have a positive impact on the stock market. However, GDP numbers alone don’t always signify a healthy economy. A country’s inflation rate also needs to be taken into account when assessing real GDP.

Step 1

Add a country's cumulative expenditures to arrive at nominal GDP. Nominal GDP is the actual dollar amount a country spends. GDP expenditures are made up of personal expenditures, gross private investment, government consumption, imports and exports. This information isn't something you can easily calculate. Luckily, many government agencies calculate this for you. If interested, you may go to the U.S. Department of Commerce’s website for more information on nominal GDP.

Step 2

Calculate inflation from the base year of the Consumer Price Index. Inflation is a measure of how a price for a particular good rises over time. The Consumer Price Index (CPI) keeps a running measure of the cost of U.S. goods and services each year. The CPI measures prices from a base year, currently 1984, and tracks incremental price increases of a market basket of goods. To calculate the CPI, divide the current year's basket of goods and services by the base year's basket of goods and services. For example, if a car cost $5,000 in 1984 and currently costs $10,000, you would divide $10,000 by $5,000 to arrive at 2.00 as a CPI figure. If you wanted to see the percentage of the price increase, you would just subtract 1 from your CPI result and convert to the CPI number to percentage form.

Step 3

Divide nominal GDP by the CPI number to calculate real GDP. Real GDP represents inflation-adjusted output. For example, Zimbabwe has been increasing its nominal GDP since 2004. At first glance you might think that means the country's economy was productive and growing. In reality, Zimbabwe has experienced steep rates of inflation that, if factored into nominal GDP, would actually show Zimbabwe as trending a negative real GDP, or real economic growth. The Zimbabwean economy has shrunk since 2004.

Tips

  • Remember that there is a difference between the CPI number and the CPI percentage.

About the Author

Joshua Levenson started writing in 2010 for various websites. He graduated from the University of Washington in 2002 with a Bachelor of Science in finance and international business.

Photo Credits