Real Gross Domestic Product (GDP) is a good way to measure the health of the country’s economy. Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 2.6 percent in the fourth quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 5.0 percent.
The real gross domestic product is the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance (exports are added, imports are subtracted) in the United States, adjusted for inflation.
Calculate Real GDP
(Nominal GDP) – (Nominal * Inflation Rate) = Real GDP
- Inflation Rate of 2.5%
- Nominal GDP = 10 million
- Real GDP = $10 million – ($10 million * .025) = 9.75 million
The Bureau of Economic Analysis (BEA) is the research arm of the Department of Commerce that quarterly reports the Real GDP. The Real GDP (vs. Nominal GDP) allows a more accurate measure of how well the economy is doing. Without Real GDP, it might seem like the country is producing more when the GDP is only higher because prices are rising.
FACTS ABOUT THE REAL GDP
- Real GDP is an indicator of the health of the economy.
- The consensus is that 2.5-3.5% per year growth in real GDP is the range of best overall benefit; enough to provide for corporate profit and jobs growth yet moderate enough to not incite undue inflationary concerns.
- If the economy is just coming out of recession, it is OK for the GDP figure to jump into the 6-8% range briefly, but investors will look for the long-term rate to stay near the 3% level.
- The general definition of an economic recession is two consecutive quarters of negative real GDP growth.