Real GDP is a term that stands for real Gross Domestic Product. This is a macroeconomic measure that shows the inflation-adjusted value of goods and services produced in the United States. The real GDP transforms the money-value measure into a usable index that gives the nation's total output. You can also view real GDP as a measure used to calculate the economic growth rate based on the percentage change in quantities produced from one year to another. The GDP is always expressed in terms of base-year prices and it is sometimes known as the constant dollar GDP.
Uses of Real GDP
Real GDP is used to measure the value of goods and services within the context of inflation, which provides a more accurate account of changes in price level than nominal GDP. In practical terms, real GDP is useful in reflecting price changes from a base year while the nominal GDP is not. To calculate the real GDP, it is necessary to look at the economic output of two specific periods of time in which the average prices of goods are the same. Without the real GDP, such estimates could be artificially inflated.
Limitations of Real GDP
The greatest limitation of real GDP is the fact that it is an incomplete measure of the nation's standard of living. It is only capable of measuring output and sales for products sold on the legal market. Because real GDP is used in business cycle forecasts, those forecasts are only as accurate as the data that can be assessed. Missing or unreported market information limits the scope and accuracy of real GDP estimates. Real GDP is also unable to assess factors such as overall improvements in happiness and more specific aspects of economic welfare, such as the distribution of economic improvements among different segments of the population.