AP Macroeconomics Unit 2.6: Real vs. Nominal GDP
Overview of Real vs. Nominal GDP
This section presents an exploration of nominal GDP and real GDP.
Focus Skill: Skill 1C - Identifying economic concepts using quantitative data and calculations.
Emphasis on understanding formulas for calculating GDP values.
Nominal GDP
Definition: Nominal GDP measures the value of output without adjusting for inflation.
Formula: Nominal GDP (NGDP) = Price Level (PL) × Real GDP (RGDP).
Symbols Used:
$y$ = Income (reminder of the circular flow model, linking output to income).
$PL$ = Price Level.
Characteristics:
Reflects aggregate output in current dollars.
Calculated by summing the price of goods and services at current year prices times their quantities:
Formula representation:
ext{Nominal GDP} = ext{Sum of }( ext{Price in current year × Quantity in current year})If only real GDP is provided along with a deflator, use:
ext{Nominal GDP} = ext{Real GDP} imes rac{ ext{Aggregate Price Level}}{100}
Real GDP
Definition: Real GDP measures the output of an economy adjusted for inflation.
Formula: Real GDP (RGDP) can be evaluated through two approaches:
Using base year prices and current year quantities:
Formula representation:
ext{Real GDP} = ext{Sum of }( ext{Base Year Price × Current Year Quantity})If nominal GDP and aggregate price level are known:
ext{Real GDP} = rac{ ext{Nominal GDP}}{ ext{Aggregate Price Level}} imes 100
Characteristics:
Represents the aggregate output in constant or base year dollars.
Calculation Examples
Example for Nominal GDP:
2019 Calculations:
Nominal GDP for 2019 = 40 + 40 + 1.20 (prices per good) = $200.
2020 Calculations:
Summation of prices and quantities for nominal GDP yields 2020 nominal GDP = $232.90.
Example for Real GDP:
Real GDP for 2020:
Base year price (2019 prices) multiplied by 2020 quantities gives $211.
Note on Base Year: Nominal GDP equals real GDP in the base year (i.e., 2019).
Practice and Concept Connections
Multiple Choice Example Exploration:
Nominal GDP Increase Hypothetical (2007): Analyze if rising nominal GDP means only price level increase, real GDP increase, or both.
Difference Identification: The core difference between real and nominal GDP is adjustment for inflation. Correct answer emphasized: real GDP adjusts prices using price indices.
Comparison Calculation: If real GDP increases 3% and nominal GDP increases 7%, aggregate price level is also increasing.
The GDP Deflator
Definition: The GDP deflator is a price index measuring changes in prices for all goods and services produced domestically.
Calculating the Deflator:
ext{GDP Deflator} = rac{ ext{Nominal GDP}}{ ext{Real GDP}} imes 100Inflation Rate Calculation Formula:
ext{Inflation Rate} = rac{ ext{GDP Deflator (current year)} - ext{GDP Deflator (base year)}}{ ext{GDP Deflator (base year)}} imes 100CPI vs. GDP Deflator Comparison:
CPI evaluates consumer purchasing power and is affected by imports, while the GDP deflator assesses domestic production effects on pricing.
Sample Problem Explanations
Sample Problem 1: Calculating Real GDP
Given nominal GDP = $100,000,000,000 and the GDP deflator = 150, calculate real GDP:
ext{Real GDP} = rac{100,000,000,000}{150} imes 100 = 66,670,000,000
Sample Problem 2: Inflation Rate Calculation
CPI Base Year Example:
Base year 2013 deflator = 100, current year 2014 = 90, resulting inflation calculation:
ext{Inflation Rate} = rac{90 - 100}{100} imes 100 = -10 ext{% (deflation)}
Understanding Free Response Questions
Key Points for Exam Preparation:
When instructed to calculate, show all work, including numbers and formulas used.
Explain results clearly and logically for thorough understanding and marking.
Definitions and distinctions between concepts should be well articulated for clarity in responses.
Final Thoughts
Remember, nominal GDP is unadjusted for inflation, while real GDP is adjusted. Distinguishing between them is crucial for understanding economic output.
The GDP deflator serves as a comprehensive measure for inflation adjustments, reflecting domestic price changes effectively.
Practice calculating and interpreting these values to strengthen preparedness for assessments covering this content.
Overview of Real vs. Nominal GDP
This section presents an exploration of nominal GDP and real GDP.
Focus Skill: Skill 1C - Identifying economic concepts using quantitative data and calculations.
Emphasis on understanding formulas for calculating GDP values.
Nominal GDP
Definition: Nominal GDP measures the value of output without adjusting for inflation.
Formula: Nominal GDP (NGDP) = Price Level (PL) × Real GDP (RGDP).
Symbols Used:
$y$ = Income (reminder of the circular flow model, linking output to income).
$PL$ = Price Level.
Characteristics:
Reflects aggregate output in current dollars.
Calculated by summing the price of goods and services at current year prices times their quantities:
Formula representation:
\text{Nominal GDP} = \text{Sum of } (\text{Price in current year \times Quantity in current year})
If only real GDP is provided along with a deflator, use:
\text{Nominal GDP} = \text{Real GDP} \times \frac{\text{Aggregate Price Level}}{100}
Real GDP
Definition: Real GDP measures the output of an economy adjusted for inflation.
Formula: Real GDP (RGDP) can be evaluated through two approaches:
Using base year prices and current year quantities:
Formula representation:
\text{Real GDP} = \text{Sum of } (\text{Base Year Price \times Current Year Quantity})
If nominal GDP and aggregate price level are known:
\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Aggregate Price Level}} \times 100
Characteristics:
Represents the aggregate output in constant or base year dollars.
Calculation Examples
Example for Nominal GDP:
2019 Calculations:
Nominal GDP for 2019 = 40 + 40 + 1.20 (prices per good) = $200.
2020 Calculations:
Summation of prices and quantities for nominal GDP yields 2020 nominal GDP = $232.90.
Example for Real GDP:
Real GDP for 2020:
Base year price (2019 prices) multiplied by 2020 quantities gives $211.
Note on Base Year: Nominal GDP equals real GDP in the base year (i.e., 2019).
Practice and Concept Connections
Multiple Choice Example Exploration:
Question: If a country's nominal GDP increased by 5% and its aggregate price level increased by 2% in the same year, what was the approximate change in its real GDP?
A) 2% increase
B) 3% increase
C) 5% increase
D) 7% increase
E) 0% change
Answer: B) 3% increase
Explanation: The approximate change in real GDP can be found by subtracting the inflation rate (change in price level) from the nominal GDP growth rate. So, 5\% - 2\% = 3\%. This indicates that while the total value of goods and services produced (nominal GDP) grew by 5%, only 3% of that growth represents an actual increase in the quantity of goods and services produced (real GDP), after accounting for the 2% increase in prices.
Nominal GDP Increase Hypothetical (2007): Analyze if rising nominal GDP means only price level increase, real GDP increase, or both.
Difference Identification: The core difference between real and nominal GDP is adjustment for inflation. Correct answer emphasized: real GDP adjusts prices using price indices.
Comparison Calculation: If real GDP increases 3% and nominal GDP increases 7%, aggregate price level is also increasing.
The GDP Deflator
Definition: The GDP deflator is a price index measuring changes in prices for all goods and services produced domestically.
Calculating the Deflator:
\text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100
Inflation Rate Calculation Formula:
\text{Inflation Rate} = \frac{\text{GDP Deflator (current year)} - \text{GDP Deflator (base year)}}{\text{GDP Deflator (base year)}} \times 100
CPI vs. GDP Deflator Comparison:
CPI evaluates consumer purchasing power and is affected by imports, while the GDP deflator assesses domestic production effects on pricing.
Sample Problem Explanations
Sample Problem 1: Calculating Real GDP
Given nominal GDP = $100,000,000,000 and the GDP deflator = 150, calculate real GDP:
\text{Real GDP} = \frac{100,000,000,000}{150} \times 100 = 66,670,000,000
Sample Problem 2: Inflation Rate Calculation
CPI Base Year Example:
Base year 2013 deflator = 100, current year 2014 = 90, resulting inflation calculation:
\text{Inflation Rate} = \frac{90 - 100}{100} \times 100 = -10 \text{% (deflation)}
Understanding Free Response Questions
Key Points for Exam Preparation:
When instructed to calculate, show all work, including numbers and formulas used.
Explain results clearly and logically for thorough understanding and marking.
Definitions and distinctions between concepts should be well articulated for clarity in responses.
Free Response Question Example
Scenario: The economy of "Econland" produces two goods: Pizzas and Books.
2021 Data (Base Year):
Pizzas: Price = 10, Quantity = 100
Books: Price = 20, Quantity = 50
2022 Data:
Pizzas: Price = 11, Quantity = 110
Books: Price = 22, Quantity = 55
Question:
Calculate Econland's nominal GDP for 2021 and 2022.
Calculate Econland's real GDP for 2021 and 2022. (Use 2021 as the base year).
Calculate the GDP deflator for 2021 and 2022.
Calculate the inflation rate between 2021 and 2022.
Explain the difference between nominal GDP and real GDP and why real GDP is a better measure of economic growth.
Sample Answer:
Nominal GDP:
2021 NGDP: (10 \times 100) + (20 \times 50) = 1000 + 1000 = \$2000
2022 NGDP: (11 \times 110) + (22 \times 55) = 1210 + 1210 = \$2420
Real GDP (2021 Base Year):
2021 RGDP: (Since 2021 is the base year, Real GDP = Nominal GDP) = \$2000
2022 RGDP: (Using 2021 prices with 2022 quantities) (10 \times 110) + (20 \times 55) = 1100 + 1100 = \$2200
GDP Deflator:
2021 Deflator: (\frac{\text{Nominal GDP}{2021}}{\text{Real GDP}{2021}}) \times 100 = (\frac{2000}{2000}) \times 100 = 100
2022 Deflator: (\frac{\text{Nominal GDP}{2022}}{\text{Real GDP}{2022}}) \times 100 = (\frac{2420}{2200}) \times 100 = 1.1 \times 100 = 110
Inflation Rate (2021 to 2022):
(\frac{\text{GDP Deflator}{2022} - \text{GDP Deflator}{2021}}{\text{GDP Deflator}_{2021}}) \times 100 = (\frac{110 - 100}{100}) \times 100 = (\frac{10}{100}) \times 100 = 10\%
Explanation of Difference:
Nominal GDP measures the value of an economy's output using current prices. It does not account for inflation, meaning an increase in nominal GDP could be due to higher prices, higher output, or both.
Real GDP measures the value of an economy's output using constant base-year prices, effectively adjusting for inflation.
**Real GDP is a better measure of
Overview of Real vs. Nominal GDP
This section presents an exploration of nominal GDP and real GDP.
Focus Skill: Skill 1C - Identifying economic concepts using quantitative data and calculations.
Emphasis on understanding formulas for calculating GDP values.
Nominal GDP
Definition: Nominal GDP measures the value of output without adjusting for inflation.
Formula: Nominal GDP (NGDP) = Price Level (PL) × Real GDP (RGDP).
Symbols Used:
$y$ = Income (reminder of the circular flow model, linking output to income).
$PL$ = Price Level.
Characteristics:
Reflects aggregate output in current dollars.
Calculated by summing the price of goods and services at current year prices times their quantities:
Formula representation:
\text{Nominal GDP} = \text{Sum of }( \text{Price in current year \times Quantity in current year})
If only real GDP is provided along with a deflator, use:
\text{Nominal GDP} = \text{Real GDP} \times \frac{\text{Aggregate Price Level}}{100}
Real GDP
Definition: Real GDP measures the output of an economy adjusted for inflation.
Formula: Real GDP (RGDP) can be evaluated through two approaches:
Using base year prices and current year quantities:
Formula representation:
\text{Real GDP} = \text{Sum of }( \text{Base Year Price \times Current Year Quantity})
If nominal GDP and aggregate price level are known:
\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Aggregate Price Level}} \times 100
Characteristics:
Represents the aggregate output in constant or base year dollars.
Calculation Examples
Example for Nominal GDP:
2019 Calculations:
Nominal GDP for 2019 = 40 + 40 + 1.20 (prices per good) = $200.
2020 Calculations:
Summation of prices and quantities for nominal GDP yields 2020 nominal GDP = $232.90.
Example for Real GDP:
Real GDP for 2020:
Base year price (2019 prices) multiplied by 2020 quantities gives $211.
Note on Base Year: Nominal GDP equals real GDP in the base year (i.e., 2019).
Practice and Concept Connections
Multiple Choice Example Exploration:
Question: If a country's nominal GDP increased by 5% and its aggregate price level increased by 2% in the same year, what was the approximate change in its real GDP?
A) 2% increase
B) 3% increase
C) 5% increase
D) 7% increase
E) 0% change
Answer: B) 3% increase
Explanation: The approximate change in real GDP can be found by subtracting the inflation rate (change in price level) from the nominal GDP growth rate. So, 5\% - 2\% = 3\%. This indicates that while the total value of goods and services produced (nominal GDP) grew by 5%, only 3% of that growth represents an actual increase in the quantity of goods and services produced (real GDP), after accounting for the 2% increase in prices.
Nominal GDP Increase Hypothetical (2007): Analyze if rising nominal GDP means only price level increase, real GDP increase, or both.
Difference Identification: The core difference between real and nominal GDP is adjustment for inflation. Correct answer emphasized: real GDP adjusts prices using price indices.
Comparison Calculation: If real GDP increases 3% and nominal GDP increases 7%, aggregate price level is also increasing.
The GDP Deflator
Definition: The GDP deflator is a price index measuring changes in prices for all goods and services produced domestically.
Calculating the Deflator:
\text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100
Inflation Rate Calculation Formula:
\text{Inflation Rate} = \frac{\text{GDP Deflator (current year)} - \text{GDP Deflator (base year)}}{\text{GDP Deflator (base year)}} \times 100
CPI vs. GDP Deflator Comparison:
CPI evaluates consumer purchasing power and is affected by imports, while the GDP deflator assesses domestic production effects on pricing.
Sample Problem Explanations
Sample Problem 1: Calculating Real GDP
Given nominal GDP = $100,000,000,000 and the GDP deflator = 150, calculate real GDP:
\text{Real GDP} = \frac{100,000,000,000}{150} \times 100 = 66,670,000,000
Sample Problem 2: Inflation Rate Calculation
CPI Base Year Example:
Base year 2013 deflator = 100, current year 2014 = 90, resulting inflation calculation:
\text{Inflation Rate} = \frac{90 - 100}{100} \times 100 = -10 \text{% (deflation)}
Understanding Free Response Questions
Key Points for Exam Preparation:
When instructed to calculate, show all work, including numbers and formulas used.
Explain results clearly and logically for thorough understanding and marking.
Definitions and distinctions between concepts should be well articulated for clarity in responses.
Free Response Question Example
Scenario: The economy of "Econland" produces two goods: Pizzas and Books.
2021 Data (Base Year):
Pizzas: Price = 10, Quantity = 100
Books: Price = 20, Quantity = 50
2022 Data:
Pizzas: Price = 11, Quantity = 110
Books: Price = 22, Quantity = 55
Question:
Calculate Econland's nominal GDP for 2021 and 2022.
Calculate Econland's real GDP for 2021 and 2022. (Use 2021 as the base year).
Calculate the GDP deflator for 2021 and 2022.
Calculate the inflation rate between 2021 and 2022.
Explain the difference between nominal GDP and real GDP and why real GDP is a better measure of economic growth.
Sample Answer:
Nominal GDP:
2021 NGDP: (10 \times 100) + (20 \times 50) = 1000 + 1000 = \$2000
2022 NGDP: (11 \times 110) + (22 \times 55) = 1210 + 1210 = \$2420
Real GDP (2021 Base Year):
2021 RGDP: (Since 2021 is the base year, Real GDP = Nominal GDP) = \$2000
2022 RGDP: (Using 2021 prices with 2022 quantities) (10 \times 110) + (20 \times 55) = 1100 + 1100 = \$2200
GDP Deflator:
2021 Deflator: (\frac{\text{Nominal GDP}{2021}}{\text{Real GDP}{2021}}) \times 100 = (\frac{2000}{2000}) \times 100 = 100
2022 Deflator: (\frac{\text{Nominal GDP}{2022}}{\text{Real GDP}{2022}}) \times 100 = (\frac{2420}{2200}) \times 100 = 1.1 \times 100 = 110
Inflation Rate (2021 to 2022):
(\frac{\text{GDP Deflator}{2022} - \text{GDP Deflator}{2021}}{\text{GDP Deflator}_{2021}}) \times 100 = (\frac{110 - 100}{100}) \times 100 = (\frac{10}{100}) \times 100 = 10\%
Explanation of Difference:
Nominal GDP measures the value of an economy's output using current prices. It does not account for inflation, meaning an increase in nominal GDP could be due to higher prices, higher output, or both.
Real GDP measures the value of an economy's output using constant base-year prices, effectively adjusting for inflation.
Real GDP is a better measure of economic growth because it isolates changes in the quantity of goods and services produced from changes caused by prices, thereby providing a more accurate picture of an economy's output.
Summary of Equations
Nominal GDP (NGDP):
\text{NGDP} = \text{Price Level (PL)} \times \text{Real GDP (RGDP)}
\text{NGDP} = \text{Sum of } (\text{Price in current year \times Quantity in current year})
\text{NGDP} = \text{Real GDP} \times \frac{\text{Aggregate Price Level}}{100}
Real GDP (RGDP):
\text{RGDP} = \text{Sum of } (\text{Base Year Price \times Current Year Quantity})
\text{RGDP} = \frac{\text{Nominal GDP}}{\text{Aggregate Price Level}} \times 100
GDP Deflator:
\text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100
Inflation Rate:
\text{Inflation Rate} = \frac{\text{GDP Deflator (current year)} - \text{GDP Deflator (base year)}}{\text{GDP Deflator (base year)}} \times 100
Final Thoughts
Remember, nominal GDP is unadjusted for inflation, while real GDP is adjusted. Distinguishing between them is crucial for understanding economic output.
The GDP deflator serves as a comprehensive measure for inflation adjustments, reflecting domestic price changes effectively.
Practice calculating and interpreting these values to strengthen preparedness for assessments covering this content.
Overview of Real vs. Nominal GDP
This section presents an exploration of nominal GDP and real GDP.
Focus Skill: Skill 1C - Identifying economic concepts using quantitative data and calculations.
Emphasis on understanding formulas for calculating GDP values.
Nominal GDP
Definition: Nominal GDP measures the value of output without adjusting for inflation.
Formula: Nominal GDP (NGDP) = Price Level (PL) \times Real GDP (RGDP).
Symbols Used:
$y$ = Income (reminder of the circular flow model, linking output to income).
$PL$ = Price Level.
Characteristics:
Reflects aggregate output in current dollars.
Calculated by summing the price of goods and services at current year prices times their quantities:
Formula representation:
\text{Nominal GDP} = \text{Sum of } (\text{Price in current year \times Quantity in current year})
If only real GDP is provided along with a deflator, use:
\text{Nominal GDP} = \text{Real GDP} \times \frac{\text{Aggregate Price Level}}{100}
Real GDP
Definition: Real GDP measures the output of an economy adjusted for inflation.
Formula: Real GDP (RGDP) can be evaluated through two approaches:
Using base year prices and current year quantities:
Formula representation:
\text{Real GDP} = \text{Sum of } (\text{Base Year Price \times Current Year Quantity})
If nominal GDP and aggregate price level are known:
\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Aggregate Price Level}} \times 100
Characteristics:
Represents the aggregate output in constant or base year dollars.
Calculation Examples
Example for Nominal GDP:
2019 Calculations:
Nominal GDP for 2019 = 40 + 40 + 1.20 (prices per good) = $200.
2020 Calculations:
Summation of prices and quantities for nominal GDP yields 2020 nominal GDP = $232.90.
Example for Real GDP:
Real GDP for 2020:
Base year price (2019 prices) multiplied by 2020 quantities gives $211.
Note on Base Year: Nominal GDP equals real GDP in the base year (i.e., 2019).
Practice and Concept Connections
Multiple Choice Example Exploration:
Question: If a country's nominal GDP increased by 5% and its aggregate price level increased by 2% in the same year, what was the approximate change in its real GDP?
A) 2% increase
B) 3% increase
C) 5% increase
D) 7% increase
E) 0% change
Answer: B) 3% increase
Explanation: The approximate change in real GDP can be found by subtracting the inflation rate (change in price level) from the nominal GDP growth rate. So, 5\% - 2\% = 3\%. This indicates that while the total value of goods and services produced (nominal GDP) grew by 5%, only 3% of that growth represents an actual increase in the quantity of goods and services produced (real GDP), after accounting for the 2% increase in prices.
Nominal GDP Increase Hypothetical (2007): Analyze if rising nominal GDP means only price level increase, real GDP increase, or both.
Difference Identification: The core difference between real and nominal GDP is adjustment for inflation. Correct answer emphasized: real GDP adjusts prices using price indices.
Comparison Calculation: If real GDP increases 3% and nominal GDP increases 7%, aggregate price level is also increasing.
The GDP Deflator
Definition: The GDP deflator is a price index measuring changes in prices for all goods and services produced domestically.
Calculating the Deflator:
\text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100
Inflation Rate Calculation Formula:
\text{Inflation Rate} = \frac{\text{GDP Deflator (current year)} - \text{GDP Deflator (base year)}}{\text{GDP Deflator (base year)}} \times 100
CPI vs. GDP Deflator Comparison:
CPI evaluates consumer purchasing power and is affected by imports, while the GDP deflator assesses domestic production effects on pricing.
Sample Problem Explanations
Sample Problem 1: Calculating Real GDP
Given nominal GDP = $100,000,000,000 and the GDP deflator = 150, calculate real GDP:
\text{Real GDP} = \frac{100,000,000,000}{150} \times 100 = 66,670,000,000
Sample Problem 2: Inflation Rate Calculation
CPI Base Year Example:
Base year 2013 deflator = 100, current year 2014 = 90, resulting inflation calculation:
\text{Inflation Rate} = \frac{90 - 100}{100} \times 100 = -10 \text{% (deflation)}
Understanding Free Response Questions
Key Points for Exam Preparation:
When instructed to calculate, show all work, including numbers and formulas used.
Explain results clearly and logically for thorough understanding and marking.
Definitions and distinctions between concepts should be well articulated for clarity in responses.
Free Response Question Example
Scenario: The economy of "Econland" produces two goods: Pizzas and Books.
2021 Data (Base Year):
Pizzas: Price = 10, Quantity = 100
Books: Price = 20, Quantity = 50
2022 Data:
Pizzas: Price = 11, Quantity = 110
Books: Price = 22, Quantity = 55
Question:
Calculate Econland's nominal GDP for 2021 and 2022.
Calculate Econland's real GDP for 2021 and 2022. (Use 2021 as the base year).
Calculate the GDP deflator for 2021 and 2022.
Calculate the inflation rate between 2021 and 2022.
Explain the difference between nominal GDP and real GDP and why real GDP is a better measure of economic growth.
Sample Answer:
Nominal GDP:
2021 NGDP: (10 \times 100) + (20 \times 50) = 1000 + 1000 = \$2000
2022 NGDP: (11 \times 110) + (22 \times 55) = 1210 + 1210 = \$2420
Real GDP (2021 Base Year):
2021 RGDP: (Since 2021 is the base year, Real GDP = Nominal GDP) = \$2000
2022 RGDP: (Using 2021 prices with 2022 quantities) (10 \times 110) + (20 \times 55) = 1100 + 1100 = \$2200
GDP Deflator:
2021 Deflator: (\frac{\text{Nominal GDP}{2021}}{\text{Real GDP}{2021}}) \times 100 = (\frac{2000}{2000}) \times 100 = 100
2022 Deflator: (\frac{\text{Nominal GDP}{2022}}{\text{Real GDP}{2022}}) \times 100 = (\frac{2420}{2200}) \times 100 = 1.1 \times 100 = 110
Inflation Rate (2021 to 2022):
(\frac{\text{GDP Deflator}{2022} - \text{GDP Deflator}{2021}}{\text{GDP Deflator}_{2021}}) \times 100 = (\frac{110 - 100}{100}) \times 100 = (\frac{10}{100}) \times 100 = 10\%
Explanation of Difference:
Nominal GDP measures the value of an economy's output using current prices. It does not account for inflation, meaning an increase in nominal GDP could be due to higher prices, higher output, or both.
Real GDP measures the value of an economy's output using constant base-year prices, effectively adjusting for inflation.
Real GDP is a better measure of economic growth because it isolates changes in the quantity of goods and services produced from changes caused by prices, thereby providing a more accurate picture of an economy's output.