Real Gross Domestic Product (GDP)

Definition


What is Real GDP?

Gross domestic product (GDP) is the annual aggregate money value of all final goods and services produced by the economy. GDP changes over time when the output of goods and services changes, and when the prices of these goods and services change. Economic growth occurs when the total output of goods and services increases. Since a change in GDP can be caused by a change in prices rather than a change in output, in order to measure economic growth we must adjust GDP for the effects of inflation. Inflation-adjusted GDP is called real GDP, and it is computed by dividing nominal GDP by the relevant price index. You can review the concept of using a price index to convert nominal to real by browsing the consumer price index material on the EconData site.

Formerly, recessions were defined to be periods of two or more successive quarters of the year in which real GDP decreases. The National Bureau of Economic Research (NBER) is the organization that officially determines when the U.S. economy is in recession. The NBER recently changed the definition of recession to be "a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail trade." Thus a recession begins following a peak of business activity, while a recession ends following a trough of business activity. Using this definition the NBER declared a recession to have started in March 2001 and to have ended in November 2001.

Changes in real GDP have a direct impact on our material standard of living. For example, the Great Depression was a period of prolonged and acute recession in the U.S. and abroad, during which time the U.S. unemployment rate rose to 25 percent, the economy shrunk by 50 percent, and U.S. stocks lost about 90 percent of their value. In contrast, during the years following World War II real GDP grew at a relatively rapid pace, allowing middle-income Americans to afford a home, a car, and a college education. From 1950 to 1973, Real GDP in the U.S. grew at an average annual rate of 4.2 percent. Since that time the pace of economic growth in the U.S. has slowed to an average annual rate of about 2.5 percent.

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