Real GDP vs. GDP: When and Why Economists Make the Switch

Economic

Summary:

Discover the differences between Real GDP and GDP, why economists switch between the two, and how they impact economic analysis. Learn when to use each metric for accurate insights.

Gross Domestic Product (GDP) is one of the most widely used indicators of a country’s economic performance. It measures the total value of goods and services produced within a nation’s borders over a specific period. However, economists often switch between GDP and Real GDP when analyzing economic trends. But what’s the difference between the two, and why does it matter? In this article, we’ll explore the distinctions between Real GDP and GDP, when to use each, and why economists make the switch.

What is GDP?

GDP, or nominal GDP, represents the total monetary value of all goods and services produced in a country during a specific period, typically a quarter or a year. It is calculated using current market prices, which means it includes the effects of inflation or deflation.

Formula for GDP:GDP = Consumption + Investment + Government Spending + (Exports - Imports)

While GDP provides a snapshot of economic activity, it has a significant limitation: it doesn’t account for changes in price levels. This is where Real GDP comes into play.

What is Real GDP?

Real GDP adjusts nominal GDP for inflation or deflation, providing a more accurate measure of economic growth over time. By using constant prices from a base year, Real GDP removes the distortion caused by price changes, allowing economists to compare economic output across different periods more effectively.

Formula for Real GDP:Real GDP = (Nominal GDP / GDP Deflator) x 100

The GDP deflator is a measure of price inflation or deflation relative to the base year.

Key Differences Between GDP and Real GDP

Aspect	GDP (Nominal GDP)	Real GDP
Price Adjustment	Uses current market prices	Uses constant base-year prices
Inflation Impact	Includes inflation/deflation	Excludes inflation/deflation
Purpose	Measures current economic output	Measures economic growth over time
Accuracy	Less accurate for long-term analysis	More accurate for long-term analysis

Why Do Economists Switch Between GDP and Real GDP?

Economists use both GDP and Real GDP depending on the context and the type of analysis they are conducting. Here’s why:

1. Assessing Economic Growth

Real GDP is the preferred metric for measuring economic growth because it eliminates the effects of inflation. For example, if nominal GDP increases by 5% but inflation is 3%, the real economic growth is only 2%. Real GDP provides a clearer picture of whether an economy is genuinely expanding or if the growth is just a result of rising prices.

2. Comparing Economies Over Time

When comparing economic performance across different years, Real GDP is essential. Nominal GDP can be misleading because it doesn’t account for changes in purchasing power. For instance, a country with high inflation might show rising nominal GDP, but its citizens might not actually be better off.

3. Policy Making and Planning

Governments and central banks rely on Real GDP to design economic policies. For example, if Real GDP growth is slowing, policymakers might implement stimulus measures to boost the economy. Nominal GDP, on the other hand, is more useful for understanding the current size of the economy and tax revenues.

4. International Comparisons

When comparing the economic performance of different countries, Real GDP is often used because it accounts for differences in price levels and inflation rates. This ensures a fair comparison of living standards and productivity.

When to Use GDP vs. Real GDP

Use GDP (Nominal GDP):

To measure the current size of an economy.

To calculate per capita income in current dollars.

To analyze short-term economic trends without adjusting for inflation.

Use Real GDP:

To measure long-term economic growth.

To compare economic performance across different time periods.

To assess the impact of inflation on economic output.

Practical Example

Let’s consider an example to illustrate the difference between GDP and Real GDP.

Country A’s Economic Data:

Nominal GDP in 2022: $1,000 billion

Nominal GDP in 2023: $1,100 billion

Inflation Rate: 4%

Calculating Real GDP for 2023:Real GDP = (Nominal GDP / (1 + Inflation Rate))Real GDP = 1,100/1.04=1,100billion/1.04=1,057.7 billion

While nominal GDP suggests a 10% growth (1,000 billion to 1,100 billion), Real GDP reveals that the actual economic growth, after adjusting for inflation, is only 5.77%.

Limitations of GDP and Real GDP

While both metrics are valuable, they have limitations:

GDP: Doesn’t account for income inequality, environmental degradation, or non-market activities like unpaid work.

Real GDP: Relies on accurate inflation data, which can be challenging to measure.

Conclusion

Understanding the difference between GDP and Real GDP is crucial for accurate economic analysis. While GDP provides a snapshot of current economic activity, Real GDP offers a clearer picture of long-term growth by adjusting for inflation. Economists switch between the two depending on the context, ensuring they have the right tool for the job.

Whether you’re a policymaker, investor, or student of economics, mastering these concepts will help you make better-informed decisions and gain deeper insights into the health and trajectory of an economy.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Warren Takunda

Economic

"We still harbour doubts about a continuation of the recent CAD rally," says John Velis, Americas Macro Strategist at Bank of New York (BNY).

The observation follows a spike in the Dollar-Canadian Dollar exchange rate (USDCAD) on Monday to 1.4793 and associated spikes in non-USD/CAD exchange rates.

BNY thinks Canada is caught in tariff limbo, negatively impacting investor sentiment.

"Currency volatility is extraordinary and CAD's carry-to-volatility return since the beginning of the year is among the worst of the 30 or so currencies we characterise as the set of 'expanded majors,' ranking fifth worst. Not that the Canadian dollar is a strong carry currency, but the risk-reward of trying to trade Canada since January 1 is highly unattractive presently," explains Vallis.

The Canadian Dollar has recovered from the worst excesses of Monday's selloff to USD/CAD 1.4346, with GBP/CAD paring to 1.79 and EUR/CAD to 1.49.

The relief buying follows the last-minute avoidance of U.S.-Canada trade tariffs that were due to come into effect this week, sparking the start of a North American trade war.

Trump and Trudeau agreed to suspect the tariffs to allow negotiators to work towards a new trade deal, with feedback expected at the beginning of March.

"From a fundamental perspective, it still seems too early for long-term investors to aggressively buy the CAD as trade tensions might get worse before they get better. However, given depressed sentiment and stretched positioning, starting to build small long positions offers an attractive reward-to-risk ratio," says Chester Ntonifor, Foreign Exchange Strategist at BCA Research.

However, BNY thinks the Canadian Dollar is also at risk of dislocation in its relationship with two-year bond yields.

The bank's research shows a "remarkable" correlation between USD/CAD and the differential between U.S. and Canadian two-year yields.

"We think this correlation will reassert itself soon, considering the 2y yields reflect relative monetary policy expectations. The Bank of Canada is still quite likely to be more aggressive on rates owing to differing local macroeconomic fundamentals," warns Vallis.

Canadian Dollar Strength Draws Doubters_1

Image courtesy of BNY.

The implication is that CAD weakness will extend even as trade relations normalise.

Analysts at Goldman Sachs previously estimated that the Canadian Dollar could weaken by around 13% to a permanent 25% across-the-board tariff if the currency followed the typical response to a change in the Terms of Trade.

A lower initial tariff on energy products, which account for around a quarter of Canada’s exports to the US, lowers that estimate slightly, but given the uncertainties at play Goldman still thinks that is theright ballpark as a theoretical final resting place.

Analysts at the Wall Street bank are also watching yield differentials, noting that in the first trade war, USD/CAD would regularly trade at a 4-5% premium to rate differentials, but lately that has hovered around 1-2%.

"Taken together, we think USD/CAD will likely move about 3-5% higher from Friday’s close in the comingdays, assuming no significant progress in the ongoing negotiations," says Goldman Sachs.

Source: Poundsterlinglive

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Cryptocurrency

Bitcoin abandoned early hopes of an immediate recovery after the crypto asset continued to fall on Feb. 5, following a volatile weekly open, during which daily high and low values were almost $11,000 apart.

BTC’s daily chart closed under $100,000 for the second time since Jan. 15, with the markets estimating a period of consolidation over the next few days.

After the massive liquidation event, a cooldown period was expected for investors to readjust their positions and question whether additional downside is on the way.

How do Bitcoin drawdowns compare?

Despite the current market trepidation, Bitcoin’s price remains ~11% below its all-time high of $109,026. This is a minor drawdown for a volatile asset, which is up 131% in just over a year.

From a market trend standpoint, it is crucial to establish the threshold at which a drawdown transitions from a routine decline to a significant downturn or crash.

Over the past three bull cycles, the average BTC drawdown has progressively declined. During the 2016-2017 cycle, the average correction stood at -38%, dropping further down to -23.25% in the 2020-2021 bull run. Is Bitcoin Price Going to Crash Again?_1

Is Bitcoin Price Going to Crash Again?_1

Bitcoin price drawdown analysis chart. Source: X.com

In 2024-2025, the maximum BTC drawdown is 26%, which took place over a period of six months from March to August 2024. The average drawdown was a mere 12% for 2024-2025; in 2025, it is 8.9%.

Therefore, none of the corrections since August 2024 can be considered a crash since most of the corrections have been relatively lower than the average drawdown over the past six months.

Will Bitcoin price crash to $90,000?

After failing to establish a daily candle close above $105,000, Bitcoin’s market structure is beginning to mirror the consolidation phase that took shape in March 2024. Over a period of six months, BTC formed a lower high and lower low pattern, which saw the price drop from a high of $73,881 to a low of $49,000. However, the lowest candle close was around $54,839. Is Bitcoin Price Going to Crash Again?_2

Is Bitcoin Price Going to Crash Again?_2

BTC/USDT 1 week chart. Source: TradingView

The worst-case scenario for Bitcoin, which does not alter current average drawdowns, is a drop-down to $81,500 from its current all-time high, which is exactly 26%.

Meanwhile, a correction down to $90,000 is close to 14%, which is roughly 60% of the largest drawdown from the current cycle. Therefore, there is a probability that BTC will re-test the $90,000 over the next few weeks, considering the market structure is becoming bearish in the short term.

Source: Cointelegraph

Risk Warnings and Disclaimers

Add to Favorites

ING

Economic

The National Bank of Poland did not change rates nor its post-meeting press release. The hawkish tone remains firmly in place. We are looking forward to tomorrow’s press conference by the NBP governor but do not expect a shift in his stance.

Rates and tone unchanged and virtually no changes in the press release

Today's decision by the Monetary Policy Council to keep interest rates unchanged was widely expected. The benchmark rate has remained at 5.75% since October 2023. We view the tone of the official statement following the MPC meeting as hawkish, similar to the previous one and the last two speeches by NBP President Glapiński. Glapiński is likely to maintain his hawkish tone at tomorrow's press conference. However, after the January presser, the NBP president's hawkish message was not fully reflected in market pricing. Financial markets do not share this approach and are pricing in 90bp of cuts by the end of 2025 and 150bp by the end of 2026.

There are virtually no changes in the post-meeting press release, apart from updates on key economic data from abroad and domestically. The only new element is a statement that uncertainty in the major economies is linked to possible changes in global trade policy. This is justified in light of the turmoil related to Trump's tariffs in recent days.

Little new data: GDP in 2024 and strong zloty

It has been less than three weeks since the Council's January meeting, so it was difficult to expect significant changes. In the absence of the publication of the January inflation estimate, the main information the Council received since the previous meeting was the preliminary GDP estimate of 2.9% in 2024, as well as the monthly data for December. These show that the recovery resumed in the economy in fourth quarter 2024.

On the other hand, the restrictiveness of monetary policy and the outlook for inflation improved by the recent strengthening of the zloty and the lowest EUR/PLN exchange rate since 2018, despite strong fluctuations in the main currency pairs. Should the strengthening of the zloty prove to be sustained, this could accelerate the timing of inflation's return to target.

January's NBP Quick Monitoring report suggests that exporters are flexibly adjusting the break-even exchange rate in the wake of the strengthening of the zloty (in 4Q24 the export profitability threshold for EUR/PLN was as low as 4.01), but another wave of appreciation was realised in the first weeks of 2025. Still, the percentage of exports that lose profitability at the current rate is not high (around 3% of export turnover and 14% in terms of the number of exporters), but both percentages have returned to 2010-13 levels, still well below the pre-Lehman tops. The growing interest rate disparity between Poland and the euro area is a strong support for the zloty. This is due to both the central banks' decisions to date (a total of five ECB cuts of 125bp since the end of the tightening cycle, 100bp in Poland) and the expected ones (the market is pricing in three more cuts in the eurozone by July this year, and one in Poland at the same time).

We still see NBP rate cuts of 50-100bp in 2025

Recent statements by Council representatives (Kotecki: rates may start to be cut from July, and there is room for cumulative cuts of 50-100bp by the end of 2025; Duda: there may be room for small rate cuts towards the end of 2025; Janczyk: a rate cut in 2025 is still possible, and the magnitude we may argue for is still 50-100bp in the second half of 2025) virtually rule out the possibility of a change in monetary policy parameters over the next few months.

We expect the NBP governor to stick to his hawkish bias tomorrow, as we believe his overly pessimistic view on regulated prices and headline CPI for fourth quarter 2025 should also remain unchanged. The NBP's tolerance for a strong zloty is high.

However, we expect the domestic and foreign context to allow for a discussion of rate cuts in mid-year. We still assume a 50-100bp cut in 2025. Our inflation forecasts for fourth quarter 2025, when the energy shields will be lifted, are significantly lower than those presented by the NBP governor at the previous meeting. In addition, the delivered inflation in 4Q24, stronger PLN, as well as possible trade wars – through oversupply in Europe as a result of reduced exports from China and Europe to the US – mean that the chances of a lower inflation trajectory in 2025 are increasing.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Alex

Economic

The DXY dollar index is roughly 2% off its recent highs and the question for investors is whether a further 1-2% is required. Driving this correction have been several factors, the largest of which has probably been this week's tariff news, where it looks like the Trump administration has been using tariffs for transactional not ideological purposes (this may change in the second quarter), ING’s FX analyst, ING’s FX analysts Chris Turner notes.

DXY probably trades in a tightish 107.50-108.00 range

“Important as well has been the drop in 10-year US Treasury yields below 4.50%. A well-received Quarterly Refunding announcement yesterday certainly helped. Our rate strategy colleagues discuss that move here. The move lower in USD/JPY has caught the attention as data and Bank of Japan commentary have built up confidence in this year's BoJ tightening cycle.”

“Determining whether DXY corrects another 1-2% will probably be tomorrow's jobs data. We saw earlier this week from the US JOLTS job opening data that soft figures can hit the dollar. Yet we doubt the dollar correction will last too long. We look for more structural and broader tariffs to come back into play in the second quarter. Our rates team also doubts US Treasury yields will drop much further from here.”

“So while a soft NFP number tomorrow could drag DXY back towards the 106.35/50 area – we would see that area as the bottom of the trading range this first quarter. Today the US calendar is pretty light. Unless jobless claims rise dramatically, DXY probably trades in a tightish 107.50-108.00 range.”

Source：FXStreet

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Owen Li

Cryptocurrency

West Texas Intermediate (WTI) Oil price holds modest gains after three consecutive days of losses, trading around $71.10 per barrel during European trading hours on Thursday. This rebound in crude Oil prices comes after Saudi Arabia’s state Oil giant, Aramco, raised prices for Asian buyers.

Aramco’s price hike was driven by rising demand from China and India, along with disruptions to Russian supply due to US sanctions. Further supply risks persist as US President Donald Trump’s renewed push to eliminate Iran’s Oil exports could remove up to 1.5 million barrels per day from the market.

On Wednesday, Oil prices dropped more than 2% as a sharp increase in US crude and gasoline stockpiles signaled weaker demand. US crude inventories surged by 8.664 million barrels for the week ending January 31, 2025, the largest build in nearly a year, far exceeding market expectations of a 2.6 million-barrel increase. Meanwhile, distillate stockpiles, which include diesel and heating Oil, declined by 5.471 million barrels, compared to an expected draw of 1.5 million barrels.

Adding to market pressure, ongoing US-China trade tensions intensified as China imposed tariffs on American coal, LNG, and crude Oil, fueling concerns over weakened global demand. Additionally, these retaliatory measures could lead to a decline in US Oil exports in 2025 for the first time since the COVID-19 pandemic, following a plateau in growth last year.

Source：FXStreet

Risk Warnings and Disclaimers

Add to Favorites

Owen Li

Cryptocurrency

The oil market sold off yesterday despite US President Trump’s directive to increase economic pressure on Iran, which would include targeting oil exports from the country. Instead, the market focused on the tariff story, a theme likely to dictate sentiment for much of this year. In addition, the EIA’s weekly inventory report was fairly bearish with a large increase in crude oil stocks over the last week, ING’s commodity analysts Warren Patterson and Ewa Manthey notes.

Cold weather boosts distillate demand

“EIA data showed that commercial US crude oil inventories increased by 8.66m barrels over the last week, the largest build since February 2024. The increase was driven by strong imports, which grew by 467k b/d WoW with stronger flows from Canada, which increased 347k b/d. In addition, oil output recovered last week, following the impact of winter storms.”

“Crude oil output in the Lower 48 is estimated to have grown by 232k b/d. Refiners also increased their utilisation rates by 2.4pp over the week, which saw gasoline inventories rising by 2.23m barrels. However, distillate stocks fell by 5.47m barrels over the week. Cold weather boosted distillate demand, with implied demand hitting its highest level since early 2022.”

“So far today, oil prices are holding up better as Saudi Arabia has increased its official selling prices for all grades and to all regions for March loadings. This ties in with the strength that we have seen in the Middle East physical market since the start of the year. Aramco’s flagship Arab Light into Asia was increased by US$2.40/bbl to US$3.90/bbl over the benchmark – the highest level since December 2023. It is also the largest monthly increase since August 2022.”

Risk Warnings and Disclaimers

Add to Favorites