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.

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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

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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

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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.

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Warren Takunda

Economic

Global shares rose on Thursday in a modest relief rally as fears of an escalating trade war between the U.S. and its major trading partners ebbed, while U.S. Treasury yields came under pressure as traders pondered the country's rate outlook.

European stock futures pointed to solid gains ahead of a slew of earnings releases, extending a rally from the previous session in part due to a surge in healthcare stocks as sales of Novo Nordisk's blockbuster drug Wegovy more than doubled in the fourth quarter.

EUROSTOXX 50 futures rose 0.5%, while FTSE futures jumped 0.8%. DAX futures climbed 0.56%.

Wall Street was similarly poised for a positive open, with S&P 500 futures and Nasdaq futures gaining more than 0.2% each.

Amazon's earnings are due later in the day, where the pressure is on for it to deliver on lofty expectations for cloud computing after lacklustre reports from Microsoft and Alphabet jolted investor faith in Big Tech's huge investments in artificial intelligence.

And though many uncertainties remain under U.S. President Donald Trump's new administration, markets were for the most part relieved that things were not worse, particularly with regard to the tit-for-tat tariff moves.

That helped lift global share markets and kept the dollar in check, giving some respite to its peers that had been heavily battered at the start of the week.

"Relief is probably a good way to characterise (the market mood)," said Khoon Goh, head of Asia research at ANZ.

The People's Bank of China on Thursday again set a stronger-than-expected yuan midpoint fixing, though the yuan still weakened after China sought the World Trade Organization's intervention to rule on new tariffs imposed by Trump.

China's commerce ministry also said on Thursday that Beijing is ready to work with other countries to jointly respond to the challenges of unilateralism and trade protectionism, and labelled U.S. tariffs "vile".

The onshore yuan last stood at 7.2845 per dollar, while its offshore counterpart eased 0.05% to 7.2862.

"Chinese authorities at this stage are not indicating or showing any intention of weakening the yuan as part of the response to the tariffs. I think that has definitely helped to calm the market down," said ANZ's Goh.

China's CSI300 blue-chip index jumped more than 1% as investors continued to bet on domestic AI firms following Chinese start-up DeepSeek's breakthrough.

The Shanghai Composite Index gained 1.16%.

MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.44%, while Japan's Nikkei tacked on 0.6%.

RATES OUTLOOK

U.S. Treasury yields were hovering near their lowest in over a month on Thursday, as investors were uncertain about the outlook for rates in the world's largest economy.

U.S. Treasury Secretary Scott Bessent said on Wednesday that while Trump wants lower interest rates, he will not ask the Federal Reserve to cut rates.

Bessent said in an interview with Fox Business Network that he and Trump are focused on the 10-year Treasury.

"Certainly, those comments were interesting, and perhaps a little surprising, though likely suggest that Bessent is having something of a moderating influence on Trump, given that he appears to have steered the President away from direct attacks on the Fed – at least for now," said Michael Brown, senior research strategist at Pepperstone.

"At the moment (I) think this is more about rhetoric than any firm action, which is likely why market participants have by and large shrugged the comments off, and there hasn’t been a considerable reaction."

Bessent made the comments before Fed Vice Chair Philip Jefferson, who said he is content to keep the central bank's policy rate in its current position until policymakers get a better sense of the net effects of the Trump administration's policies on tariffs, immigration, deregulation and taxes.

The benchmark 10-year Treasury yield was steady at 4.4342%, while the two-year yield edged slightly higher to 4.2055%.

Futures point to just about 45 basis points worth of easing from the Fed by the year-end. .

In currencies, the dollar was on the back foot.

"The central vibe running through trade has been the solid bid in U.S. Treasuries, with the U.S. dollar finding increased selling flows across the G10 FX complex," said Chris Weston, head of research at Pepperstone.

Against the dollar, the euro hovered above the $1.03 level and last bought $1.0390, while sterling strayed not too far from a one-month high and was fetching $1.2480.

The Bank of England announces its rate decision later on Thursday, where it looks set to deliver a rate cut.

The yen , meanwhile, was little changed at 152.59 per dollar, after earlier rising on comments from Bank of Japan board member Naoki Tamura who said the central bank must raise short-term interest rates to at least 1% by the second half of fiscal 2025 to contain inflation risks.

In commodities, oil prices rose, steadying from a sell-off the previous day after Saudi Arabia's state oil company sharply raised March oil prices.

U.S. crude edged 0.42% higher to $71.33 a barrel, while Brent crude rose 0.31% to $74.84 per barrel.

Gold eased from a record peak and was last at $2,860.11 an ounce.

Source: Reuters

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Owen Li

Cryptocurrency

Alberta is looking to bring Canadian LNG to Japan as Canada’s oil and gas-producing province seeks alternative export routes for its energy amid tariff threats from the U.S. Administration.

This week, Rebecca Schulz, Alberta’s Minister of Environment and Protected Areas, is holding meetings with industry and trade associations in Tokyo to discuss Canadian energy exports to Japan. At one of these meetings, Schulz discussed “the critical importance of Canadian LNG to Japan’s energy security.”

“As Japan shifts from away from coal, reliable LNG from Canada will reduce emissions while strengthening economic ties between both nations,” Schulz posted on X.

Canada will have its first LNG export project up and running this year—LNG Canada is close to shipping its first cargo.

Alberta needs to find more export routes for its energy, Schulz told Reuters in an interview published on Thursday.

“Given what we've seen in the United States, this is reinforcement that we need to diversify our export markets, and Japan, our already existing relationship, is going to be a key area of focus,” the Alberta minister told Reuters.

Alberta has advantages over the U.S. in terms of geography—the Alberta-Japan route for LNG and other energy exports is much shorter than the U.S. Gulf Coast-Japan route, Schulz said, adding that the province also presents “less geopolitical risk” than the U.S. currently.

Alberta is working on four or five projects for additional export capacity, Schulz told Reuters.

“We are looking forward to receiving shipment from LNG Canada but we want to diversify our energy sources so there is more that needs to be done from Canada,” Yuya Hasegawa, Director of Energy Resources Development Division at Japan’s Ministry of Economy, Trade, and Industry, said during the meetings in Tokyo this week.

While Alberta is on a charm offensive in Japan, U.S. President Trump is set to meet with Japanese Prime Minister Shigeru later this week and could discuss potential Japanese support for a planned $44-billion LNG export project in Alaska.

Source: OILPRICE

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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.”