What Is Real GDP?

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.