Real Economic Growth Rate

As per the Real Economic Growth Rate definition, it could be referred to as the Factor that helps in measuring the overall Economic Growth as it is capable of relating to the Gross Domestic Product (GDP) from a single period to another. Moreover, the same factor is adjusted well for Inflation and is known to be expressed in real terms in opposition to the nominal terms.

The value of Real Economic Growth Rate is known to be represented as a specific percentage for showing the overall rate of change in the GDP of the country –usually from one year to its subsequent year. Another important measure for economic growth is regarded as the GNP or Gross National Product. In some cases, this is preferred in case the Economy of the nation tends to be significantly dependent on foreign Earnings.

Using the Real Economic or GDP Growth Rate

The real economic or GDP growth rate turns out to be a highly useful measure in comparison to the nominal GDP rate of growth. This is because the former is known to regard the overall effects of inflation on the existing economic data. The value of Real Economic Growth Rate serves to be a constant value figure. Therefore, it tends to avoid the distortions from instances of higher deflation or inflation. As such, it turns out to be a highly consistent measure.

Calculation of Real Economic Growth Rate

The GDP is indicated as the total sum of business spending, consumer spending, government spending, and total exports sans total imports. The calculation that factors in inflation to be included in the Real Economic Growth Rate figure is:

Real GDP = GDP / (1 + Inflation since the time of Base Year)

The given base year serves to be the designated year. It gets updated on a periodic Basis by the respective government. Moreover, the same is utilized in the form of a comparison point for economic data like the GDP. The calculation for measuring the real growth rate of GDP makes use of real GDP as its base:

Real GDP Growth Rate = (real GDP of the most recent years –real GDP of last year) / real GDP of previous year

How to Use Real GDP Growth Rate?

The real value of the overall economic growth rate of a country serves to be useful to the policymakers of the government to make sound decisions with regard to the fiscal policy. The given decisions are required to be applied for increasing the overall economic growth or controlling inflation. Figures related to real economic growth of the country delivers two purposes. Firstly, the given figure is utilized for comparing the ongoing rate of the overall economic growth with old periods for ascertaining the general trend in the overall growth with time.

Secondly, the same is useful while making a comparison of the growth rates of economies that are similar and have significant varying rates of inflation.