Real GDP is defined as a measurement of the economic output of a
country minus the effect of inflation.
The Difference Between Real and Nominal GDP Unlike real GDP, nominal GDP is the measurement that leaves price changes in the estimate. Therefore, nominal GDP is usually higher. Real GDP is always given in terms of a base year. Real GDP is what nominal GDP would have been if there was no price changes from the base year. How to Calculate Real GDP The formula for real GDP is nominal GDP divided by the deflator, or R = N/D. The deflator is a measurement of inflation since the base year How Does Real GDP Measure Production? Real GDP measures the final output of everything produced in a country. It does not measure sales. For example, the car is measured when it comes off the factory line and is shipped to the dealership. It is recorded as an addition to inventory, which increases GDP. When it is sold and driven off the lot, then it is recorded as a subtraction to inventory, and actually lessens GDP -- unless the factory builds another car to replace it. GDP only counts final production. How Does Real GDP Measures Services? Real GDP also measures services, such as your hairdresser, bank, and even the services provided by non-profits such as Goodwill. However, some services are not measured because it is too difficult. These include unpaid childcare, elder care or housework, volunteer work for charities, or illegal or black- market activities
Why Is Real GDP Important? Real GDP is important for two reasons. First, it tells you how much the economy is producing Real GDP can also be used to compare the size of economies throughout the world. Real GDP is also used to compute economic growth, known as the GDP growth rate The ideal GDP growth rate is between 2-3% The GDP growth rate is critical for investors to adjust the asset allocation in their portfolios. They also compare countries' GDP growth rates -- countries with strong growth attract more investors for their corporate stocks, bonds and even their own sovereign debt. Central Banks review GDP growth when deciding on the Fed funds rate (Prime Rate) It will raise the rate when growth is too fast, and lower it when growth is too slow. The GDP growth rate is the most important indicator of economic health. When the economy is expanding, the GDP growth rate is positive. If it's growing, so will business, jobs and personal income. If it's slowing down, then businesses will hold off investing in new purchases and hiring new employees, waiting to see if the economy will improve
How GDP Affects You For example, when the GDP growth rate is slowing down or even contracting, the Fed will lower interest rates to stimulate growth. If you are buying a home when this happens, you'd want an adjustable-rate mortgage so you can take advantage of future lower rates. If GDP growth rates are increasing, then you'd want to consider a fixed-rate mortgage. That way, you can lock in low interest rates, because the Fed usually raises them if growth is too fast The Basics of Economic Indicators Economic indicators are pieces of data from important economic reports. Most of economic indicators are published by government agencies or select private groups Major Economic Indicator Employment Reports. Reports on Inflation and Money Supply .Interest Rate Statements. Retail Sales Reports .Gross Domestic Product
What Is GDP? The best way to understand a country's economy is by looking at its Gross Domestic Product (GDP). This economic indicator measures the country's total output. This includes everything produced by all the people and all the companies in the country
What are the components of GDP? Personal Consumption Expenditures plus Business Investment plus Government Spending Plus (Exports minus Imports). It's easy to calculate GDP using the standard formula: C + I + G + (X- M). What is Nominal GDP? A gross domestic product (GDP) figure that has not been adjusted for inflation. What is GDP per Capita? GDP per capita is a measurement of how prosperous a country feels to each of its citizens GDP per capita takes a country's production, as measured by GDP, and divides it by the country's total population. Hence, it is the output of a country's economy per person.
What Is the Gross National Product? Gross National Product (GNP) is a measurement of the economic power of a country. It measures the same things as Gross Domestic Product (GDP) with two important differences. These differences mean that GNP is a more accurate measure of a country's income than its production. For example, U.S. GNP includes all income earned by American residents and businesses, regardless of where it's made. Specifically, GNP counts the investments made by U.S. residents and businesses, both inside and outside the country. In addition, it includes the value of all products manufactured by domestic businesses, regardless of where they are made. On the other hand, GNP wouldn't count any income earned in the U.S. by foreign residents or businesses. Therefore, it doesn't include investments made by overseas residents. It also excludes products manufactured in the U.S. by overseas businesses. For these reasons, the GNP of the U.S. tells you more about the financial well-being of Americans, and American-based multi-national corporations, than it does about the health of the U.S. economy. What IS GNP per Capita? GNP per capita is a measurement of GNP divided by the number of people in the country.
What's the Best Way to Compare GDP by Country? There are three ways to compare the economic output, or Gross Domestic Product (GDP), between countries. To determine which one to use, you've first got to decide what your purpose is. 1. Official Exchange Rate 2. Purchasing Power Parity 3. GDP per Capita
Official Exchange Rate The most commonly agreed-upon measure is the country's GDP by Official Exchange Rate (OER). This gives the economic output within the country's own currency. It can be used to give you an idea of how much the country can use its economic power to purchase on the international markets. Use the OER method to measure GDP by country when you want to compare two emerging market countries to each other, or two developed economies to each other. You can also use it to compare the country's economic output over time, as long as its exchange rate hasn't changed dramatically. There are two disadvantages to using the OER method. The first, is that exchange rates change over time. The second is that they can be manipulated. Therefore, the OER method can lead you to draw misleading conclusions. 2. Purchasing Power Parity Purchasing power parity (PPP) is an economic theory that states residents of one country should be able to buy the goods and services at the same price as residents of any other country over time. Why do economists say that? Because, ultimately, competition in international trade allows people to shop around for the best price. In other words, everyone's purchasing power will become equal, or reach parity. PPP is based on the law of one price. This states that once the difference in exchange rates is accounted for, then everything would cost the same. Purchasing power parity (PPP) allows you to make more accurate comparisons of the economies of two countries. It's calculated by determining what each item purchased in a country would cost if it were sold in the U.S. 3. GDP per Capita GDP per capita is a good way to compare the economic output of a country as it relates to the standard of living of its residents. What are the Top 5 Economic Statistics for Global Investors? 1. Gross Domestic Product 2. Employment Indicators 3. Consumer Price Index 4. Central Bank Minutes 5. Purchasing Manager's Index (PMI) Manufacturing & Services
What Is Fiscal Policy? Fiscal policy is how the government manages its budget. It collects revenue via taxation that it then spends on various programs. The purpose of fiscal policy is to create healthy economic growth and increase the public good for the long-term benefit of all. What Are The Tools of Fiscal Policy? The first tool is taxation, whether of income, capital gains from investments, property, sales or just about anything else. Taxes provide the major revenue source that funds government. The downside of taxes is that whatever or whoever is taxed has less income to spend themselves. That makes taxes very unpopular The second tool is spending. The reason government spending is a tool is that whatever or whoever receives the funds has more money to spend, thus driving demand and economic growth. What Is The Expansionary Fiscal Policy? A government uses expansionary fiscal policy to stimulate the economy and create more growth. How does expansionary fiscal policy work? The government spends more, or cuts taxes, or both if it can. The idea is to put more money into consumers' hands, so they spend more. This jump starts demand, which keeps businesses running, and hopefully adds jobs Contractionary Fiscal Policy A government uses Contractionary Fiscal Policy is to slow down economic growth. Why would you ever want to do that? One reason only, and that's to stamp out inflation. That's because the long-term impact of inflation can damage the standard of living as much as a recession. What are the tools of contractionary fiscal policy? taxes are increased spending is cut. Fiscal policy is seen as being the less efficient way to influence growth trends.