What does ‘real’ mean in economics?
In economics, the term “real” means relating to things or events in terms of their actual value and not merely their cost. For example, if you go out for dinner and spend $200 on a meal for two people, your nominal GDP is $400. However, this does not take into account inflation; so if inflation was 2% that year then the real GDP would be $380.
For example, if you go out for dinner and spend $200 on a meal for two people, your nominal GDP is $400. However, this does not take into account inflation; so if inflation was 0% that year then the real GDP would be $380.
(If I gave you money to buy groceries and told you how much it cost me to make those purchases with that amount of currency)
To do this in math terms:
Nominal = Real + Inflation (Nominal gdp – Real gdp x 100 / Nominal gdp).
This means that even though there may have been economic growth when looking at nominal dollars spent during the year, there were no changes made to keep up with price changes and the economy did not experience growth.
This means that even though there may have been economic growth when looking at nominal dollars spent during the year, there were no changes made to keep up with price changes and the economy did not experience any true economic growth.
The government uses real GDP as a measure of how an economy is doing because it takes into account inflation
This can distort other measures like unemployment rates or stock market indices by hiding what’s really going on in an economy.
The government uses real GDP as a measure of how well an economy is doing because it takes into account inflation which can distort other measurements such as unemployment rates or stock market indices by hiding what’s really going on in an economy. For example, if the unemployment rate is low, but inflation rates are high, then the real purchasing power of people’s incomes has decreased.
However, if you look at nominal dollars spent during the year in a scenario where there was no change made to keep up with price changes and an economy did not experience any true economic growth then that would be false GDP as it does not account for price increases.
The government prefers using real GDP because taking into consideration how much more expensive things have become when compared to past years or decades helps provide a clearer picture of how well an economy is doing; whereas looking just at what’s happening now doesn’t take anything else into account besides what’s going on right now.