How do economists determine the real GDP per capita?
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Economists determine the real GDP per capita by following a multi-step process. Let me explain each step to you:
1. Define Real GDP: Real GDP (Gross Domestic Product) is a measure of a country's total economic output adjusted for inflation, meaning it accounts for changes in prices over time.
2. Obtain Nominal GDP: The first step is to determine the nominal GDP, which represents the total economic output of a country without adjusting for inflation. It is calculated by multiplying the quantity of goods and services produced by their current market prices.
3. Adjust for Inflation: In order to account for changes in price levels, economists calculate the inflation rate using a price index like the Consumer Price Index (CPI). The inflation rate measures the average rate at which prices of goods and services are increasing or decreasing.
4. Apply the GDP Deflator: The GDP deflator is a measure of the difference between nominal GDP and real GDP. It is calculated by dividing nominal GDP by real GDP and multiplying by 100.
5. Compute Real GDP: To calculate the real GDP, economists divide the nominal GDP by the GDP deflator and multiply it by 100. This process adjusts the nominal GDP for changes in price levels, allowing for a more accurate measure of economic output.
6. Divide by Population: Finally, to determine the real GDP per capita, economists divide the real GDP by the country's population. This provides a measure of economic output per person on average, taking into account both the total output and the number of individuals in a country.
It is essential to note that the process I described is a simplified explanation. Economists employ more sophisticated techniques to calculate real GDP per capita, including using more comprehensive price indices and accounting for various factors that affect economic output.