Real GDP
Quick Definition
Gross domestic product adjusted for inflation, measuring the actual volume of goods and services produced in an economy.
Key Takeaways
- GDP adjusted for inflation — shows actual changes in economic output
- The standard measure for comparing growth across time periods
- Calculated by deflating nominal GDP with a price index
- Two consecutive quarters of negative real GDP is commonly called a recession
What Is Real GDP?
Real GDP measures economic output in constant prices, removing the distorting effects of inflation or deflation to reveal genuine changes in the quantity of goods and services produced. It is calculated by deflating nominal GDP using a price index (typically the GDP deflator or chain-weighted price index). Real GDP is the standard measure used to compare economic growth across time periods and is the basis for determining whether an economy is in recession (commonly defined as two consecutive quarters of negative real GDP growth). The U.S. Bureau of Economic Analysis reports real GDP in chained 2017 dollars. Real GDP growth rates provide the most accurate picture of whether an economy is producing more or fewer goods and services, independent of price changes.
Real GDP Example
- 1U.S. real GDP contracted 3.4% in 2020 during the pandemic, then rebounded 5.7% in 2021.
- 2If nominal GDP grows 8% and the GDP deflator shows 5% inflation, real GDP growth is approximately 3%.
- 3Two consecutive quarters of negative real GDP growth is the common (though unofficial) definition of a recession.
Related Terms
Nominal GDP
Gross domestic product measured at current market prices without adjusting for inflation.
GDP Deflator
A price index that measures the overall level of prices for all goods and services produced in an economy, used to convert nominal GDP to real GDP.
GDP (Gross Domestic Product)
The total monetary value of all finished goods and services produced within a country's borders in a specific time period.
Potential GDP
The maximum level of output an economy can sustain over time without generating accelerating inflation, determined by labor, capital, and technology.
Economic Growth
The increase in the production of goods and services in an economy over time, typically measured by the growth rate of real GDP.
Federal Reserve (The Fed)
The central banking system of the United States, responsible for monetary policy, bank regulation, and financial stability.
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