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The constant dollar GDP is a way of measuring the gross domestic product in terms of inflation-adjusted dollars. This is important because the value of currency changes over the years. In order to truly understand a country's GDP, it is important to establish a benchmark year. This figure is sometimes called the real GDP or inflation-corrected GDP.
The opposite measurement is the nominal GDP, which measures the gross domestic product, the value of all goods and services produced in a country, in the value of the currency for that particular year. While this may provide valuable information about a country's economic condition over a short time frame, it provides very little usable information for comparison over time because it does not take into account the effects of inflation.
This is why the constant dollar GDP is so important. The first step in determining the number is to determine a baseline year, which will be the same as the nominal GDP. From there, all other years included in the study will require an adjustment.
For example, if the GDP for a country in 2005 were $10 billion US Dollars (USD), and inflation were 5% in 2006, then the next year's figure would have to take that into account. If, in 2006, the nominal GDP were $11 billion USD, at first glance it would seem like an increase of 10%. Taking the increase in inflation into account, however, the real GDP for 2006 would be $10,450,000,000 (USD), which is 5% of $11 billion. Therefore, the constant dollar GDP is determined to have only increased 4.5%.
The baseline year chosen is often near the middle of the data set being considered. For example, if comparing the figure for years between 1980 and 2000, the year 1990 may be chosen as the baseline. While this is common practice, there is no set rule for choosing the year.
The constant dollar GDP can often indicate if the standard of living in a country has improved over time. The theory is that, if the country has an increased level of economic production, its citizens will naturally benefit. On the other hand, if the country has a contraction in economic activity, its citizens are likely to experience harmful effects. This is a generalization that may not be true in all cases.