Measuring Real National Income

Real GDP measures the volume of output. An increase in real output means that AD has risen faster than the rate of inflation and therefore the economy is experiencing positive growth.

Consider this example

The money value of a country’s GDP is calculated to be $4,000m in 2010. In 2011, the money value of GDP expands to $4,500m but during the year, inflation is 3% causing the general index of prices to rise from a 2010 base year value of 100 to 103 in 2011.

The real value of GDP in 2011 is calculated thus:

Real GDP = money value of GDP in 2011 x 100 / general price index in 2010

= £4,500 x 100/103 = $4,369 (measured at constant 2010 prices)

Note here that the real GDP data is expressed at constant priceswhich mean that we have made an inflation adjustment. Look for this in the data response questions in the exam.