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Gross domestic product (GDP) refers to the total value of all goods and services produced in a single country within one year. This figure is one of the most widely-used measures of the economic health of a country. While GDP provides vital information about the economy as it whole, it does little to help people understand economic trends over time, or how changes in the economy affect the quality of life for the people in a nation. To capture changes in GDP and compare them to historical data, analysts must adjust GDP for inflation, resulting in a figure known as real GDP. To use GDP to gather information about a country's standard of living, GDP must be adjusted once more to determine real GDP per capita.
GDP can be calculated by simply adding up the final value of all goods and services produced within a single year. In order to transform GDP into real GDP however, one must compare growth in GDP to a base year value. This allows economists to examine current and past GDP values more effectively, in units that share similar values. One way to do this is to adjust past GDP values based on the current value of those dollars. By adjusting GDP for inflation in this manner, one can arrive at real GDP.
Real GDP alone provides an accurate look into how an economy has grown, shrunk, or remained stagnant over time. This allows leaders to evaluate financial policies and determine whether new policies are needed to improve the economy. To give real GDP a more human perspective, however, one should take the time to calculate real GDP per capita. Real GDP per capita is equal to the real GDP of a country divided by the number of people living in that country. It is expressed as currency units per person, such as United States dollars per person.
Real GDP per capita provides insight into the standard of living within a country. This figure helps to illustrate income distribution among the entire population, and can provide important information about the quality of life for majority of the people in a country. It also helps economists gain a clear perspective of real GDP growth without the impact of population growth. For example, if real GDP per capita doubles in a country within a decade, this could indicate a fast-growing economy. If the population of that country tripled over the same time period, than the economy may actually be shrinking or remaining stagnant.