Gross Domestic Product (GDP) is a key indicator of a country’s economic situation. It refers to the sum of all finished goods and services produced in the country during a specific timeframe, typically twelve months. Real Gross Domestic Product removes inflation from the equation. This allows changes in the prices of those goods and services to be taken out, giving a more accurate figure, particularly when making comparisons between years.
- Skill level:
Find out the UK’s Gross Domestic Product figure for the year you wish to analyse (see Resources). Government agencies report this figure annually. It comprises the overall market value of all final goods and services produced in a country in that year, plus the value of exports, calculated against total consumer, government and investor spending and the value of imports.
Determine a base year from which to make your calculations. This is an arbitrary year intended purely as a comparison. At present, the Office of National Statistics has made the base year 2005.
Subtract the GDP figure for the base year from the GDP figure from the year you wish to calculate. For instance, if the GDP figure for the base year is £800 and that for the current year is £1000, the result is £200.
Calculate the GDP deflator figure by dividing the change in GDP by the GDP figure for the base year. In the above example, the calculation would be £200 divided by £800, giving an answer of 0.25. The GDP deflator is the metric that accounts for the level of inflation that has occurred between the two years.
Divide the GDP figure for the current year by the GDP deflator figure to determine the Real GDP. In the above example, the calculation would be £1000 divided by 0.25, giving a result of £4000.
Tips and warnings
- Inflation goes up when the price of goods and services rises. This means that the purchasing power of a country’s currency is reduced. When prices fall, the currency is deflated.
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