How to Calculate the Real GDP Growth Rate

The real Gross Domestic Product (GDP) growth rate measures economic expansion or contraction. Unlike nominal GDP, the real GDP growth rate adjusts for inflation, offering a more accurate depiction of actual output changes. This rate helps gauge whether an economy is truly growing, stagnating, or shrinking.

Understanding Key Concepts

Nominal GDP represents the total market value of all final goods and services produced within a country’s borders during a specific period, valued at current market prices. This measure can be misleading for comparisons over time because it includes price changes, meaning an increase in nominal GDP might reflect inflation rather than increased production.

The GDP Deflator is a price index for all new, domestically produced, final goods and services. It reflects changes in the price level of output relative to a base year. By removing the effects of price changes, the GDP Deflator allows for a clearer view of changes in the actual quantity of goods and services produced.

Real GDP is nominal GDP adjusted for inflation using the GDP Deflator. It measures the total value of goods and services produced at constant prices, reflecting the true volume of production. This adjustment makes real GDP a preferred metric for assessing economic growth and comparing economic output across different periods.

The Real GDP Growth Rate Formula

Calculating the real GDP growth rate involves two steps. First, convert nominal GDP into real GDP using the GDP Deflator. The formula for real GDP is: Real GDP = Nominal GDP / (GDP Deflator / 100). This calculation removes the inflationary component, providing a constant-price measure of economic output.

Once real GDP figures are available for two consecutive periods, the real GDP growth rate can be determined. The growth rate formula is: ((Real GDP in Current Year – Real GDP in Previous Year) / Real GDP in Previous Year) 100. This formula quantifies the percentage change in inflation-adjusted output. A positive percentage indicates economic expansion, while a negative percentage signals contraction.

Gathering the Data

The U.S. Bureau of Economic Analysis (BEA) is the primary source for official U.S. economic statistics, including Gross Domestic Product data. This information is often accessible through the Federal Reserve Economic Data (FRED) database, maintained by the Federal Reserve Bank of St. Louis.

When searching these sources, look for data series labeled “Gross Domestic Product” for nominal GDP. For the GDP Deflator, search for “Gross Domestic Product: Implicit Price Deflator” or “GDP Price Deflator.” Retrieve these data points for both the current and preceding periods.

Applying the Calculation

Assume hypothetical nominal GDP figures and GDP Deflator values for two consecutive years, Year 1 and Year 2, to illustrate the method. For example, let Nominal GDP Year 1 be $20,000 billion and GDP Deflator Year 1 be 110. For Year 2, let Nominal GDP be $21,500 billion and GDP Deflator be 112.

Calculate the real GDP for each year using the formula: Real GDP = Nominal GDP / (GDP Deflator / 100). For Year 1, Real GDP = $20,000 billion / (110 / 100) = $18,181.82 billion. For Year 2, Real GDP = $21,500 billion / (112 / 100) = $19,196.43 billion.

Finally, compute the real GDP growth rate using the formula: ((Real GDP in Current Year – Real GDP in Previous Year) / Real GDP in Previous Year) 100. The growth rate is (($19,196.43 billion – $18,181.82 billion) / $18,181.82 billion) 100 = 5.58%. This indicates the economy experienced a 5.58% increase in its inflation-adjusted output from Year 1 to Year 2.