Real GDP and potential GDP treat inflation and unemployment differently. Real GDP is more accurate as it describes the actual financial state, while potential GDP is an estimate. Real GDP can change during a quarter, while potential GDP is based on an estimated inflation rate and cannot increase more than its estimated value. Unemployment is also treated differently, with potential GDP taking it as a constant and real GDP measuring the actual rate.
Gross domestic product (GDP) has many different measurements, including real GDP and potential GDP, but these numbers are often so similar that it can be difficult to know the differences. Real GDP and potential GDP treat inflation differently, as potential GDP is based on constant inflation while real GDP can change. Potential GDP is an estimate that is often reset each quarter by real GDP, while real GDP describes the actual financial state of a country or region. It’s based on a constant inflation rate, so potential GDP can’t go higher, but real GDP can go higher. As with the inflation rate, these measurements of GDP treat unemployment as a constant or as a variable.
Inflation, positive or negative, is a factor that constantly influences a country or a region. While this is true, real GDP and potential GDP treat inflation differently, often resulting in differences ranging from small to major. With potential GDP, inflation is treated as a constant, so the rate never changes. In calculating real GDP, the actual inflation rate – which is subject to change – is used. The inflation rate of potential GDP is usually reset each quarter to the rate of inflation that occurred with real GDP.
Real GDP is the most accurate of real GDP and potential GDP measurements, because it describes how well a country or region is actually doing financially. Potential GDP is used as an estimate that describes how a country or region might do during a quarter, but the actual measurement could be entirely different. This means that real GDP is often used to see how a country or region did in the last quarter, while potential GDP is used as a metric for the next quarter.
It is based on an estimated inflation rate, so potential GDP cannot increase more than its estimated value. Real GDP can change dramatically during the quarter, based on production amounts and inflation. While potential GDP is often thought of as a tool to show the highest value of a country’s or region’s GDP, real GDP can sometimes be higher than potential GDP.
Unemployment is a factor that can affect the output, inflation rates and overall value of a country or region. Just as with inflation rates, potential GDP takes unemployment as a constant while real GDP measures the actual unemployment rate. The unemployment rate typically doesn’t change as much as inflation rates, so it tends to have less of an impact on the value of GDP.
Protect your devices with Threat Protection by NordVPN
