Real GDP Calculation: A Step-by-Step Guide

How to calculate the real GDP?

Given the current price level and nominal GDP, what is the process of determining the real GDP in an economy?

Calculating Real GDP

Calculating the real GDP involves adjusting the nominal GDP for inflation using the price level as a reference point. This adjustment ensures that the value of goods and services produced in an economy is measured accurately.

Understanding Real GDP Calculation

Real GDP, or Gross Domestic Product adjusted for inflation, provides a more accurate reflection of an economy's output by accounting for changes in price levels over time. To calculate the real GDP, you need to follow these steps:

1. Determine the Base Year: Select a base year for comparison. In this case, the base year is 1987.

2. Use the Formula: Real GDP = (Nominal GDP / Price Level) x 100

3. Substitute the Values: Given the nominal GDP of $43,500 and a price level of 145 in 1987, plug these values into the formula.

4. Perform the Calculation: Real GDP = ($43,500 / 145) x 100 = 300

Therefore, the real GDP for 1987 is 300. This adjusted figure accounts for changes in the price level, providing a more accurate representation of the economy's actual output.