For instance, if prices in an economy have risen by 1% since the base year, the deflated number is 1.01. If nominal GDP is $1 million, real GDP equals $1,000,000 divided by 1.01, or $990,099.
How do you arrive at a dollar figure for GDP?
GDP is estimated by summing all of the money spent in a given period by consumers, corporations, and the government. It can also be determined by totaling all of the money received by all of the economy’s participants. In either scenario, the figure represents a “nominal GDP” estimate.
How much is the current GDP dollar?
PCE increased as a result of increases in both services (headed by food services and lodging) and commodities (led by “other” nondurable goods, notably pharmaceutical products). Increases in equipment (headed by transportation equipment) and intellectual property items accounted for the growth in nonresidential fixed investment (led by research and development). The increase in exports was due to an increase in both products and services (dominated by non-automotive capital goods) (led by travel). A drop in retail trade inventories led to a drop in private inventory investment. The reduction in federal spending was mostly due to lower nondefense spending on intermediate goods and services. Nondefense services decreased in the second quarter as banks’ processing and management of Paycheck Protection Program (PPP) loan applications on behalf of the federal government reduced.
In the second quarter, current dollar GDP climbed 13.0 percent on an annual basis, or $684.4 billion, to $22.72 trillion. Current-dollar GDP climbed by 10.9 percent, or $560.6 billion, in the first quarter (revised, tables 1 and 3). The Key Source Data and Assumptions file on BEA’s website has more information on the source data that underpins the estimates.
In the second quarter, the price index for gross domestic purchases grew 5.7 percent, compared to 3.9 percent (revised) in the first quarter (table 4). The PCE price index climbed by 6.4 percent, compared to a 3.8 percent gain in the previous quarter (revised). The PCE price index climbed 6.1 percent excluding food and energy expenses, compared to 2.7 percent overall (revised).
Personal Income
In the second quarter, current-dollar personal income fell $1.32 trillion, or 22.0 percent, compared to an increase of $2.33 trillion (revised), or 56.8%, in the first quarter. The decrease was primarily due to a reduction in government social benefits associated with pandemic relief programs, particularly the reduction in direct economic impact payments to households established by the Coronavirus Response and Relief Supplemental Appropriations Act and the American Rescue Plan Act (table 8). Effects of Selected Federal Pandemic Response Programs on Personal Income provides more information on issues that affect personal income.
In the second quarter, disposable personal income fell $1.42 trillion, or 26.1 percent, compared to a rise of $2.27 trillion, or 63.7 percent (revised), in the first quarter. In contrast to a 57.6% gain in real disposable personal income, real disposable personal income fell by 30.6 percent.
Personal spending climbed by $680.8 billion, following a $538.8 billion increase. An increase in PCE for services drove the increase in outlays.
In the second quarter, personal savings totaled $1.97 trillion, down from $4.07 trillion (revised) in the first quarter.
In the second quarter, the personal saving rate (savings as a proportion of disposable personal income) was 10.9 percent, down from 20.8 percent in the first quarter.
Source Data for the Advance Estimate
A Technical Note that is issued with the news release on BEA’s website contains information on the primary source data and assumptions used in the advance estimate. For each release, a thorough Key Source Data and Assumptions file is also available. See the “Additional Information” section below for more information on GDP updates.
Annual Update of the National Economic Accounts
The Annual Update of the National Income and Product Accounts is included in today’s publication; the updated Industry Economic Accounts, as well as the third estimate of GDP for the second quarter of 2021, will be provided on September 30, 2021. The update covered the period from the first quarter of 1999 through the first quarter of 2021, with revisions to GDP, GDI, and their primary components. The base year is still 2012. GDP and the Economy, a May Survey of Current Business item, contains more information about the 2021 Annual Update.
From the second quarter of 2009 through the fourth quarter of 2019, real GDP increased at a pace of 2.3 percent annually, the same as previously reported. Real GDP declined at an annual rate of 19.2% from the fourth quarter of 2019 to the second quarter of 2020, which is the same as previously reported. Real GDP increased at an annual rate of 14.1 percent from the second quarter of 2020 to the first quarter of 2021, an upward revision of 0.1 percentage point from the previously released estimate.
BEA’s archives contain previously released estimates that have been superseded by today’s publication.
Updates for the First Quarter of 2021
Real GDP is expected to rise 6.3 percent in the first quarter of 2021 (table 1), 0.1 percentage point lower than previously reported. Downward revisions to federal government spending, state and local government spending, and exports were largely offset by an upward revision to nonresidential fixed investment in the revision.
Real GDI is now expected to have climbed 6.3 percent in the first quarter (table 1), compared to 7.6 percent in the prior released figures. Compensation was the biggest factor in the negative revision, which was based on fresh first-quarter wage and salary estimates from the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages.
The price index for gross domestic purchases is now anticipated to have risen 3.9 percent in the first quarter, down 0.1 percentage point from the previous estimate (table 4). The PCE price index climbed by 3.8 percent, which is 0.1 percentage point higher than the prior estimate. The PCE price index grew 2.7 percent, 0.2 percentage point more than previously reported, when food and energy prices were excluded.
Lesser Known Data Unadjusted for Inflation
Although many important economic variables, such as GDP and exports, are adjusted for inflation, some less important measures are not. Any nominal data series can be deflated to real values using a simple process.
Changing Nominal to Real
Two elements are required to convert a series into real terms: nominal data and an appropriate price index. The nominal data series consists of data collected by a government or commercial survey and measured in current dollars. The right pricing index might originate from a variety of places. The Consumer Price Index (CPI), Producer Price Index (PPI), Personal Consumption Expenditure Index (PCE), and GDP deflator are some of the most often used price indexes.
Common price indices compare the value of a basket of products over time to the value of the same basket over time in a base period. They’re computed by dividing the value of the basket of items in the interest year by the base year’s value. This ratio is then multiplied by 100, as is customary.
In general, statisticians fix price indexes to 100 in a specific base year for ease of use and reference. To deflate a nominal series using a price index, the index must be divided by 100. (decimal form). Divide nominal values by the price index (decimal form) over the same time period to get the formula for a real series:
Mechanics of Price-Level Effects on Economic Data
But how does this simple formula distinguish price variations from changes in the overall value of a variable? The product of the amount sold and the selling price is used to determine economic indicators measured in dollar values such as GDP, exports, construction contract values, venture capital, and retail sales. Analysts aim to understand changes in quantity sold rather than price changes since it is the quantity of products and services consumed by families that influences well-being, not the price of those goods and services. In other words, the percentage change in actual values over time should reflect the percentage change in quantity.
Three Sample Scenarios
Table 1 shows three options for adjusting the data to account for price variations.
Price and quantity are multiplied together in each scenario to arrive at a nominal value in 2005 and 2010. The nominal value of 2010 is then divided by the ratio of the 2010 and 2005 price indexes to arrive at a real value (or the 2010 value in 2005 dollars).
What is the formula for converting nominal to real GDP?
We’d like to look at changes in the physical volume of output using GDP. Because Nominal GDP (GDP with inflation) might change due to changes in the prices at which output is valued, we must “deflate” the value recorded for Nominal GDP (GDP with inflation) into “real” dollars in order to make year-to-year comparisons.
Real GDP:
Real GDP is calculated by dividing GDP at current market prices (Nominal GDP) by the equivalent GDP deflator.
Only changes in the physical volume of output can produce changes in real GDP. As a result, real GDP is thought to be a more accurate indicator of economic growth than nominal GDP.
Adjustments to GDP with GDP Deflator
How can you tell if a change in a country’s level of output is due to a real change in productivity or whether it is due to fluctuations in the level of the prices of that output? Since inflation varies from year to year and a country’s productivity level over time is tracked in monetary terms using GDP, how can you tell if a change in a country’s level of output is due to a real change in productivity or whether it is due to fluctuations in the level of the prices of that You won’t be able to.
If you recall the concept of “keeping all else constant,” you’ll immediately see that you won’t be able to fairly compare a country’s GDP from year to year unless you adjust GDP to account for the effect of inflation.
To address this problem, a “fudge factor” known as the GDP deflator is employed to transform Nominal GDP (GDP adjusted for inflation) into Real GDP (GDP without the effects of inflation). Real GDP is calculated by dividing nominal GDP by the GDP deflator. The GDP deflator is a tool that is used to “balance out” the impacts of inflation.
How do you determine the rate of real GDP growth?
The percentage change in real GDP per capita between two consecutive years is used to compute the annual growth rate of real GDP per capita. GDP at constant prices is divided by the population of a country or area to get real GDP per capita. To make calculating country growth rates and aggregating country data easier, real GDP data are measured in constant US dollars.
In billions of dollars, what is the current GDP?
According to our econometric models, the US GDP will trend around 22790.00 USD Billion in 2022 and 23420.00 USD Billion in 2023 in the long run. The gross domestic product (GDP) is a measure of a country’s economic output and income.
What is the formula for calculating real GDP per capita?
The formula for calculating a country’s total economic output per person after adjusting for inflation is known as the Real GDP Per Capita Formula. Real GDP per capita is computed by dividing the country’s real GDP (total economic output adjusted for inflation) by the total number of people in the country, according to the formula.
Key Points
- The GDP deflator is a price inflation indicator. It’s computed by multiplying Nominal GDP by Real GDP and then dividing by 100. (This is based on the formula.)
- The market value of goods and services produced in an economy, unadjusted for inflation, is known as nominal GDP. To reflect changes in real output, real GDP is nominal GDP corrected for inflation.
- The GDP deflator’s trends are similar to the Consumer Price Index, which is a different technique of calculating inflation.
Key Terms
- GDP deflator: A measure of the level of prices in an economy for all new, domestically produced final products and services. The ratio of nominal GDP to the real measure of GDP is used to compute it.
- A macroeconomic measure of the worth of an economy’s output adjusted for price fluctuations is known as real GDP (inflation or deflation).
- Nominal GDP is a non-inflationary macroeconomic measure of the value of an economy’s output.
What is the true economic value of money?
- A product’s actual value, also known as its relative price, is its nominal value adjusted for inflation and expressed in terms of another product.
- For economic measurements like the gross domestic product (GDP) and personal incomes, real values are more relevant than nominal values.
- A deflator is used to adjust the nominal value of time-series data, such as GDP and incomes, to obtain real values.