Essential definitions

Nominal GDP

Output valued at prices prevailing in the period measured.

Real GDP

Output valued using constant prices, removing changes in the general price level.

Real GDP per capita

Real GDP divided by population.

Separate more production from higher prices

Nominal GDP values output at current prices. A bakery selling the same number of loaves at higher prices raises nominal output without making more bread. Real GDP values production at constant prices, so changes reflect quantities rather than the general price level.

A GDP deflator is a price index for domestically produced final output. The base period has index 100. Real GDP = nominal GDP ÷ deflator × 100. Nominal and real GDP use the same currency scale; the real figure is in base-period prices. Dividing by an index of 120 and multiplying by 100 removes a 20% price-level increase relative to the base. The consumer price index covers household purchases instead, so it is not automatically an interchangeable deflator.

Adjust for population

GDP per capita means GDP per person. Real GDP per capita = real GDP ÷ population. If total output grows but population grows faster, output per person falls. Keep units consistent: 550 billion currency units divided by 25 million people gives 22,000 currency units per person, not 22.

For growth over a period, use (new value − old value) ÷ old value × 100. Choose real total output to measure production growth, or real output per person to allow for population. Subtracting population growth from output growth gives only an approximation; dividing the two growth factors gives the exact per-person change.

Apply the same reasoning to income

Real GNI removes price changes from residents' national income using an appropriate supplied deflator. If nominal GNI is 525 billion and its deflator is 105, real GNI is 500 billion. With 20 million residents, that is 25,000 base-period currency units per person.

An average can rise while many households gain little. It also leaves out leisure, environmental damage and distribution. Use a consistent price base over time. Comparing countries additionally requires a common currency and allowance for different local prices, which the next lesson introduces.

Apply and evaluate

• Real per-capita growth improves a useful material indicator but cannot establish a broad improvement in well-being on its own.
• Base-year choices, revisions and difficult service-sector measurement limit precision.

Real-world application