When you hear that a country's GDP report does not specify a GDP type, it is most likely nominal GDP. Nominal GDP includes prices and growth, while real GDP is pure growth.

Preface:

Actual GDP is a measure of economic output that measures the impact of inflation or deflation . It provides a more realistic growth assessment than nominal GDP. Without actual GDP, just price increases are like a country is producing more.

Important points

• Real GDP measures the total economic output for a specific year, taking into account changes in price levels.
• Because it takes inflation into account, you can compare GDP by year.
• This shows a good point in the position of the economy in the business cycle.
• Understanding real GDP trends can help you prepare for a recession or make good financial decisions.

Comparison of real GDP versus nominal GDP

When you hear that a country's GDP report does not specify a GDP type, it is most likely nominal GDP. Nominal GDP includes prices and growth, while real GDP is pure growth. If there is no price change in the base year, this is nominal GDP. As a result, nominal GDP is higher. 2

The US Bureau of Economic Analysis reports both real and nominal GDP. It calculates the actual U.S. GDP at the annual interest rate specified in the benchmark year. It does not include imports and foreign income from U.S. companies and people. The line chart below

shows the annual rate of real and nominal GDP in the United States from 1998 to 2018. Hovering your mouse over each point can compare the differences between these two GDPs.

Comparison of US nominal GDP with real GDP (2012-2019)

Since 2012, BEA has adjusted the inflation rate of real GDP. The chart shows how much inflation has impacted GDP since then.

Blue is the nominal GDP purple is the actual GDP3

How to calculate the actual GDP

The formula for real GDP is nominal GDP divided by the deflating index:

R = N/D.

For example, the real GDP in 2019 was US$19.073 trillion. The nominal GDP is US$21.427 trillion. The deflating index is 1.1234.

19.073 trillion US dollars = 21.427 trillion US dollars/1.1234.

Economic Analysis Bureau calculates the deflating index of the United States. It measures inflation since the specified base year. That is the cost ratio today compared to the base year. It is similar to consumer price index , but has different weights.

BEA publishes the so-called implicit deflating index in the National Income Product Account or NIPA Table 1.1.9. You can find it in the Interaction Table section of the BEA website.

How to measure production

Real GDP measures the final output of all goods and services produced in the United States in the last quarter. It only counts in final production. BEA does not count the parts that make cars, such as tires, steering wheels, or engines.

in GDP ingredient reports are classified into production categories, so you can tell what is most helpful to the economy.

How it measures the service

real GDP also measures the service. This includes services provided by your hairdresser, your bank, and even nonprofit organizations such as goodwill. It includes services provided by the U.S. military, even if the troops are abroad. It also measures housing services provided by homeowners, including maid services.

But BEA does not calculate certain services because they are too difficult to measure. These include unpaid parenting, elderly care or housework, charity volunteers or illegal or black market activities. The book "The Real Wealth of the Nation" believes that these services are provided with false measurements of real production in the United States.

Why use real GDP to calculate growth

Real GDP is used to calculate economic growth. The percentage change in real GDP is the GDP growth rate. You need to use real GDP so that you can make sure that what you are calculating is real growth, not just price and wage growth. This is the way to calculate the GDP growth rate.

Then, real GDP can be used to determine whether the U.S. economy is growing faster or slower than the same quarter in the previous quarter or the previous year.This way, you can determine where the economy is in the business cycle. This is the real GDP growth rate in the United States since 1929.

has an ideal GDP growth rate of between 2% and 3%. BEA will modify its quarterly estimates monthly when new data is received.

GDP growth rate is crucial for investors to adjust their asset allocation in their portfolios. They also compared the country's GDP growth rate. The strong growth countries attracted more investors with their company stocks, bonds and even sovereign debt.

Comments on the Federal Reserve when making a decision GDP growth rate. When the growth is too fast, it will increase the rate, and when the growth is too slow, it will decrease the rate.

Real GDP tells you how much the economy is producing. Real GDP can be used to compare the size of economies around the world. However, to compensate for different living expenses between countries, you must use PPP.

Note: Other ways to compare GDP by country is by calculating and comparing the official exchange rate and GDP per capita

When should nominal GDP be used if your other variables do not exclude inflation, you must use nominal GDP. For example, if you compare debt to GDP, nominal GDP must be used because a country's debt is also nominal debt. To understand the historical trend of U.S. debt as a nominal GDP every year, it can be traced back to 1929.

GDP How does GDP affect you

When GDP growth slows down or even shrinks, the Fed will lower interest rates to stimulate growth. If this happens when you are buying a home, you need a mortgage with adjustable interest rates so that you can take advantage of the lower interest rates in the future. You might even want to consider reducing the size.

GDP growth rate declines may also lead to recession, which means you should prepare for layoffs. If GDP growth is increasing, you may want to consider a fixed-rate mortgage. This way, you can lock in low interest rates because if the growth is too fast, the Fed will raise interest rates.

You can read the editor’s previous article about GDP ranking. Among the actual GDP, China is the number one! !