Calculating Real GDP - Using the Real GDP Formula

This short study note looks at how students can use the formula for calculating a nation's real GDP.

The formula for calculating real GDP is:

Real GDP = (Nominal GDP / Price Index) x 100

Where:

• Nominal GDP is the value of all goods and services produced in an economy in a given year, measured at current market prices. This is also known as money GDP.
• Price Index is a measure of the overall level of prices in an economy. It is typically expressed as an index, with a base year set to equal 100. (This is otherwise known as the General Price Level)

Here is a worked example:

For example, if nominal GDP in a given year is $1,000 billion and the price index is 110 (meaning that prices are 10% higher than in the base year), real GDP would be calculated as follows:

Real GDP = ($1,000 billion / 110) x 100 = $909.1 billion

Real GDP measures the value of all goods and services produced in an economy, adjusted for changes in the price level. It is a more accurate measure of economic activity than nominal GDP, as it takes into account the impact of inflation.