The real GDP is a quarterly statistic published by central banks. It represents the real, as opposed to nominal, value of the economy’s current output. This means it takes out the effect of inflation and thus allows us to focus on production. It is the most used economic indicator. When you see in the newspaper that GDP grew by 3% in the second quarter, they are talking about real GDP.

Real GDP is used to track the business cycle, forecast GDP in coming quarters, allow international comparisons of economic performance, and compare the economic richness of different nations.

Real GDP = nominal GDP valued in the prices of the base year. Basically, this means you take the total amount of all goods and services produced and multiply them by their prices during the base year. The limitations of Real GDP as a measure are numerous. First of all, like nominal GDP, it assigns no value to household production (goods produced in homes and not formally sold) or the underground economy. Also, the GDP of a nation doesn’t take into account things like personal security, environmental cleanliness, or democracy. Lastly, it can give inaccurate results for international comparisons since the prices of identical commodities in different countries can be dramatically different.

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