Search results
Sep 17, 2020 · Real GDP per capita is a country's economic output for each person adjusting for inflation. The formula, how to calculate, annual data since 1947.
- Kimberly Amadeo
- Overview
- Lesson Overview
- Definitions of nominal v. real GDP
- Real GDP weighs output using prices from a base year
- The GDP deflator and real GDP
- Key Equations
- Common misperceptions:
- DIscussion questions
In this lesson summary review and remind yourself of the key terms and calculations used in calculating real and nominal GDP. Topics include the distinction between real and nominal GDP and how to calculate and use the GDP deflator.
Lesson Overview
Even GDP needs to keep it real. When we calculate GDP using today’s prices, we are creating a measure called nominal GDP. However, prices can change even if output doesn’t change. Because of that, our measure of output might get distorted by something like inflation.
We account for this using real GDP, which is a measure of GDP that has been adjusted for the price level. In this way, real GDP is a truer measure of output in an economy. There are two approaches to adjusting nominal GDP to get real GDP: 1) using the same prices every year or 2) using the GDP deflator.
Key Terms
Key takeaways
Even GDP needs to keep it real. When we calculate GDP using today’s prices, we are creating a measure called nominal GDP. However, prices can change even if output doesn’t change. Because of that, our measure of output might get distorted by something like inflation.
We account for this using real GDP, which is a measure of GDP that has been adjusted for the price level. In this way, real GDP is a truer measure of output in an economy. There are two approaches to adjusting nominal GDP to get real GDP: 1) using the same prices every year or 2) using the GDP deflator.
Nominal GDP is a measure of how much is spent on output. For example, in Canada during 2015, CAN $1,994.9 billion was spent on the goods and services produced in Canada. Nominal GDP measures aggregate output (meaning the value of all of the final goods and services produced) using current prices. In other words, these figures reflect the amount s...
Real GDP is a measure of how much is actually produced. Real GDP measures aggregate output using constant prices, thus removing the effect of changes in the overall price level. For example, in 2015 the value of Canada’s output expressed in constant 2010 prices was CAN $1,857 bilion .
Here’s another way to think about Real GDP: if we add up all of the output that was produced in Canada during 2015 by using the prices that these goods sold for in 2010, the value of GDP in Canada is $1,857 billion . But if we add up all of the output that was produced in Canada during 2015, using the prices that they sold for in 2015, the value of GDP in Canada is $1,995 billion . This means prices must have increased between 2010 and 2015.
However, there is a slight problem with the method above. Calculating real GDP by weighting final goods and services by their prices in a base year can lead to an overstatement of real GDP growth because the prices of some goods decrease over time. Therefore, this method overstates growth in real GDP because it makes it seem like goods make up a bigger share of spending than they really do.
[Can you explain that further?]
Another method of calculating real GDP involves converting nominal GDP to real GDP by using the GDP deflator, which tracks price changes of a nation’s output over time. Canada’s GDP deflator for its base year of 2010 was 100 since this is the year against which prices are compared. By 2015 the deflator had increased to 107.4 , indicating that the average prices of Canada’s output had increased by 7.4% .
By expressing 2015’s output in 2015 prices, therefore, Canada’s output would appear to have increased by 7.4 more than it actually did. Canada’s nominal GDP, which has been “inflated” by higher prices, can be “deflated” by dividing the country’s nominal GDP of CAN $1,994 billion by the deflator expressed in hundredths.
[Can you show me this process?]
[Data Source]
Real GDP=Nominal GDPGDP deflator (in hundredths)Nominal GDP=Real GDP×GDP deflator (in hundredths)
•An increase in GDP does not necessarily mean a nation has produced more output; it must be specified whether the GDP in question is nominal or real. An increase in nominal GDP may just mean prices have increased, while an increase in real GDP definitely means output increased.
•The GDP deflator is a price index, which means it tracks the average prices of goods and services produced across all sectors of a nation's economy over time. With this index, changes in the average price level (inflation or deflation) can be calculated between years. However, this is not the most commonly used price index for tracking inflation and deflation. The consumer price index (CPI) is the most commonly used price index, which you'll learn more about later in this course.
•Why could calculating GDP each year using current prices overstate or understate changes in actual output year to year?
[Can I check my answer?]
•Why do increases in real GDP indicate an improvement in living standards, whereas increases in nominal GDP might not?
[Can you explain this?]
•The table below shows the output and the prices of Switzerland in 2017 and in 2018.
Mar 31, 2024 · What's the Difference Between GDP Per Capita and Per Capita Income? GDP per capita is the economic output of a nation per person. It's used to measure the prosperity...
People also ask
What is real GDP per capita?
How do you understand GDP per capita?
What is the difference between real GDP and nominal GDP?
How much would a real GDP be?
Nominal Gross Domestic Product (GDP) and Real GDP both quantify the total value of all goods produced in a country in a year. However, real GDP is adjusted for inflation, while nominal GDP isn’t. Thus, real GDP is almost always slightly lower than its equivalent nominal figure.
Recall that nominal GDP is defined as the quantity of every final good or service produced multiplied by the price at which it was sold, summed up for all goods and services. In other words, nominal GDP is the value of output produced: [latex]\text {Nominal Value of Output}=\text {Price}\times\text {Quantity of Output} [/latex]
Mar 29, 2022 · The Gross Domestic Product per capita, or GDP per capita, is a measure of a country's economic output that accounts for its number of people. It divides the country's gross domestic product by its total population.
GDP per capita stands for Gross Domestic Product (GDP) per capita (per person). It is derived from a straightforward division of total GDP (see definition of GDP) by the population.
