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What is a Constant Dollar GDP?
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.
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Discussion Comments
@allenJo - I have a friend who thinks that government figures are basically meaningless. I don’t know that I agree with him, as he hasn’t been able to offer any supporting evidence for his belief.
But he basically says that the real GDP figures are massaged and tweaked to make them look better than they are, and that current dollar GDP is simply the tip of the iceberg for how much the real numbers actually differ from what’s reported.
Again, I don’t necessarily agree with his contention. My point to him is if I don’t feel it hit my pocket book when I go to the store or in my income, then the real economic picture isn’t as bad as he makes it out to be. Sure, we all feel the pinch from time to time, but the sky isn’t falling.
@everetra - I don’t know much about GDP but you do mention a good point about inflation eating into our overall livelihood.
I am more concerned about Gross Domestic Income which doesn’t get the same airplay in the news as Gross Domestic Product does, but I think it hits home for most Americans.
The fact is that real personal incomes have not kept up with the pace of inflation over the past several decades. I consider the cost of living adjustment that I get every year at my company to be a paltry compensation for the real economic pressures that I face on a day to day basis, not only with actual inflation figures but also with gas prices and so forth.
Sometimes I find it difficult to figure out which economic indicators are really the most important. I firmly believe that the unemployment figure is a tell-tale sign of the health of the economy, but with other metrics I’m not so sure.
Dollar adjusted GDP is one example. While normally I would consider these numbers to be very important barometers of the health of the economy, the markets don’t always to agree.
For example, sometimes GDP news will come out that indicate the economy is weak, or soft, but for reasons that I don’t understand, the stock market will rise on the news.
I don’t know if the markets are really responding to the news, or just shrugging it off. Personally, however, I think that inflation eats away at all wealth, whether you’re talking GDP, personal income or your assets. I don’t know anyone who argues that inflation is a good thing.
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