Current dollar GDP is the most recent estimate of Gross Domestic Product (GDP) in terms of current year dollars, but comparing it to nominal GDP of other years doesn’t account for inflation. Real GDP takes inflation changes into account, allowing for a true comparison of GDP between years. Knowing current GDP in dollars can still be useful in understanding economic trends and forming the basis for comparing real growth between two different economic periods.
Current dollar GDP, or simply current GDP, is a means of understanding the most recent estimate of Gross Domestic Product (GDP) in terms of current year dollars. Sometimes referred to as nominal GDP or chained dollars, comparing current GDP to nominal Gross Domestic Product of other years will not account for the impact of inflation on the relative value, unless those other years are also converted to current dollars.
Unlike current GDP in dollars, real GDP takes inflation changes into account when comparing two or more years. This, in effect, facilitates the comparison, since it is possible to identify the true value of the Gross Domestic Product generated. For example, if current dollar GDP for the most recent calendar year indicated a 10% increase over the previous year, but the inflation rate stood at 4%, the end result would be a “real” increase in GDP. Gross Domestic of only 6%.
Although the current dollar or nominal GDP does not take into account changes in the inflation rate from one period to the next, knowing the number can still be useful in a number of ways. First, the calculation of the current dollar represents the market value of the goods and services that are produced in the considered economic period. In other words, the figure represents the reality of the value of the goods at the time they were produced. Knowing this figure is helpful in understanding exactly what was happening within a given economy at the time. Often this information can help explain economic trends that emerged in later periods and why they occurred.
Another benefit of knowing the current GDP in dollars is that it forms the basis for comparing the real or real amount of growth that took place between two different economic periods. By dividing current GDP in dollars by what is known as the GDP deflator, it is possible to allow for changes in the inflation rate between two different years. Doing so allows comparisons of the Gross Domestic Product of two different periods to be made in terms that actually demonstrate the relative value of goods and services between the two periods. It also helps show if there really was growth in the economy.
For example, suppose the most recently completed economic period is identified as Year A, while the previous economic period is known as Year B. Whether nominal or current GDP, GDP for Year A is $100B in US dollars. States and the GDP deflator is 5%, this makes real GDP for year A $95.24B USD. If current GDP for year B reached $92B USD, then true economic growth has occurred. However, if year B had nominal, or current, GDP of $96B USD, this formula will reveal that the economy declined, even though there was an increase in current dollar GDP from year B to year A.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
