Question

In the year 2011 the prices at which producers sold their output were quite real to those producers. If they had tried to sell their products at 1983 prices their customers and stockholders would have rightly thought the producers had lost touch with reality. Why, then, would an economist calculate the value of 2011 output at 1983 prices and call it “real" GDP?

Answer 1

Let's say that the price of a good in 1983 was $100 and the country produced 5 units of it.

Now in 2011, let the country produce 10 units of the same good and the price is $200. The GDP increase is 200*10 - 100*5 = 1500

However, this does not reflect the true growth of GDP. The prices have increased because of inflation. So at the new prices, the GDP calculated does not give a proper picture of the growth of the country. So the units are counted with prices of 1983 to find the real growth of GDP.

It can be argued that in this case, the price is not a necessity at all and we can simply count the increase in units. However, for the calculation of GDP multiple products are used which may have grown at different levels. So instead of finding a weighted average or going for further complicated calculations, we find what would have been the total value of the products at prices of 1983 as compared to the value of products produced in 1983 at those prices. This helps us to identify the proper growth of output and the actual growth of GDP.

SO the value calculated of 2011 output at 1983 prices is called real GDP.

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