How to Calculate Growth Rate of Real GDPGDP) calculation that is commonly used to measure the size and growth of a country's economy. Real GDP involves modifying the normal GDP figure to account for inflation and remove the impact that it has on GDP growth over time.
While Real GDP is itself a useful number calculated to reflect the value of a country's economy it is far more insightful to assess GDP over time and see how a country's economy is growing (or contracting) over time.
- GDP = Consumption + Investment + Government Spending + Exports – Imports
- Real GDP = GDP / (1 + Inflation since base year)
Calculating the Real GDP Growth RateCalculating the Real GDP growth rate is fairly straightforward after the GDP and Real GDP figures are available. It's important to note that the complexity and work required to accumulate information also means that calculating GDP (or Real GDP) personally is nearly impossible, so you will have to rely on an organization that publishes the data. Calculating the 2014 Real GDP growth rate would be done as follows:
- 2014 Real GDP Growth Rate = (2014 Real GDP – 2013 Real GDP) / 2013 Real GDP
Calculating a quarterly Real GDP growth rate is also straight forward. The quarterly Real GDP growth rate would be calculated as follows:
- 2014 Q2 Real GDP Growth Rate = (2014 Q2 Real GDP – 2014 Q1 Real GDP) / 2014 Q1 Real GDP
Importance of Using Real GDP Growth RatesInflation can have a significant impact on the dollar value of a country's economy and adjusting GDP to use Real GDP provides far more insight in terms of what the true growth has been and the true change in the country's purchasing power. Accounting for inflation when comparing growth rates across countries becomes even more important when you consider that different countries experience different inflation rates over time. A country with a 7% inflation rate will see far more of their GDP's dollar value removed by using a Real GDP figure than a country with 1% inflation over the same period. By using Real GDP you get a clearer picture in terms of the actual purchasing power improvement of the individual countries economies.
By Jeffrey Glen