Real GDP Per Capita Formula

Article byHarsh Katara
Reviewed byDheeraj Vaidya, CFA, FRM

Formula to Calculate Real GDP Per Capita

Real GDP Per Capita Formula refers to the formula used to calculate the country’s total economic output per person after adjusting the effect of the inflation. As per the formula, real GDP per capita is calculated by dividing the country’s real GDP (country’s total economic output adjusted by inflation) by the total number of persons in the country.

Key Takeaways

  1. The formula used to determine the nation’s overall economic production per person after accounting for the impact of inflation is known as the real GDP per Capita Formula.
  2. It is frequently used throughout the world to compare the average living standards of different nations throughout time.
  3. Real GDP per capita is determined using the following formula: Real GDP per Capita = Nominal GDP / (1+ Deflator) / Population

The formula to calculate real GDP per capita is represented as below

Real GDP Per Capita  = Nominal GDP/(1+ Deflator)/Population
Real-GDP-Per-Capita-Formula

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For eg:
Source: Real GDP Per Capita Formula (wallstreetmojo.com)

Where,

  • Nominal GDP/Deflator will be Real GDP
  • Deflator adjusts for inflation

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Steps to Calculate Real GDP Per Capita

The calculation of real GDP per capita will be done by using the below steps:

  1. First, one needs to calculate Nominal GDPNominal GDPNominal GDP (Gross Domestic Product) is the calculation of annual economic production of the entire country's population at current market prices of goods and services generated by four main sources: land appreciation, labour wages, capital investment interest, and entrepreneur profits calculated only on finished goods and services.read more either by using income, expenditure, or production methods.

  2. Find out the deflator which the government of that economy shall provide.

  3. Now divide the nominal GDP computed in step 1 by the deflator gathered in step 2 to arrive at Real GDPReal GDPReal GDP can be described as an inflation-adjusted measure that reflects the value of services and goods produced in a single year by an economy, expressed in the prices of the base year, and is also known as "constant dollar GDP" or "inflation corrected GDP."read more.

  4. From statistical and census reports, one can find out the country’s population.

  5. The final step is to divide the real GDP by the population yield real GDP per capita.

Examples

You can download this Real GDP Per Capita Formula Excel Template here – Real GDP Per Capita Formula Excel Template

Example #1

Country MNS has a nominal GDP of $450 billion, and the deflator rate is 25%. The population of the country MNS is 100 million. Therefore, you are required to calculate real GDP per capita.

Solution

We are given all the desired inputs to calculate Real GDP per capita.

  • Nominal GDP: 450000000000
  • Deflator: 25%
  • Population: 100000000

Therefore, the calculation will be as follows,

Real GDP Per Capita Formula Example 1.1
  • = ($450,000,000,000 / (1 + 25%)/100,000,000
Real GDP Per Capita Formula Example 1.2

Example #2

MCX is a developed economyDeveloped EconomyA developed economy is the one that has a high per capita income or per capita GDP, a high degree of industrialization, developed infrastructure, technical advances, and a relatively high rank in human development, health, and education.read more and it is that time of the year when they are required to submit the GDP data, which includes per capita as well. Below is the information gathered by the statistician department: The country’s population is 956,899 as per the last census report available. Based on the information given, you are required to calculate Real GDP per capita, assuming that the deflator to be used is 18.50%.

  • Private Consumption: 1500000
  • Government Expenditure: 2250000
  • Exports: 750000
  • Imports: 1050000
  • Deflator: 18.50%
  • Population: 956.89

Solution

Here, the ministry is trying to calculate real GDP per capita but before that, we need to calculate real GDP and for that, we will first calculate the nominal GDP.

Nominal GDP 

Real GDP Per Capita Formula Example 2.1

Nominal GDP FormulaNominal GDP FormulaThe nominal GDP formula is used to figure out the nation's gross domestic product at the current price without considering inflation. It is the total of private consumption, gross investment, government investment and trade balance.read more = Private Consumption + Govt Expenditure + Exports – Imports

=  15,00,000k + 22,50,000k + 7,50,000k – 10,50,000k

  • Nominal GDP = 34,50,000k

Therefore, the calculation of Real GDP Per Capita will be as follows,

Example 2.2

= 34,50,000k / (1 + 18.50%)/ 956.89

Example 2.3

Example #3

The analyst is looking for the next developing country to invest approximately the clients’ funds. $140 million. She has shortlisted three developing countries and now wants to select where she can invest, either in the stock or bond markets. Her criteria are to select the country with the highest real GDP per capitaReal GDP Per CapitaReal GDP Per Capita is the resulting value arrived by dividing the entire economic output of the whole country by the total number of people after adjusting the impact of inflation for comparison of the living standard amongst the countries.read more. Below are the details that she has collected.

Example 3

If the difference in the GDP per capitaThe GDP Per CapitaGDP per capita is a parameter that breaks down the GDP of a country to measure the economic prosperity of the citizens by simply dividing the GDP by the total population of that country.read more is less than 10k then she will invest the client’s funds in the ratio of real GDP per capita.

You are required to calculate the real GDP of the three countries and determine where she would be investing and what would be the allocation of $140 million of the investment amount.

Solution

Therefore, the calculation of Real GDP Per Capita will be as follows,

Example 3.1

=12378966788.00/(1+12%)/10788900.00

Example 3.2

Similarly, we can calculate Real GDP Per Capita for remaining countries.

Real GDP Per Capita Formula Example 3.3

Now from the above calculation of Real GDP, we can notice that the differences between all of them are less 10k and hence she would be investing in all the three countries with a ratio of Real GDP per capita and the investment, therefore, shall be:

Real GDP Per Capita Formula Example 3.4
  • Investment Amount = 37369543.45

Similarly, we can calculate the investment amount for the remaining countries.

 Example 3.5

Relevance and Uses

It is widely used worldwide to compare the standard of living across countries over some time. Per capita would mean what is the GDP per person for that economy. The higher the figure, the better it is. However, nominal GDP includes inflation, and hence when one compares nominal GDP over different periods, it would also include growth with respect to inflation. This would inflate the growth rate and hide the real picture. Hence, using real GDP removes the effect of inflation which makes comparison smoother.

Frequently Asked Questions (FAQs)

What are per capita GDP and real GDP?

Real GDP does not account for the impact of price increases and instead measures the actual increase in products and services. The average GDP per person in the economy is taken into account when calculating real GDP per capita.

What justifies economists’ use of real GDP per capita?

To gauge an economy’s growth rate free from the distortions of inflation, economists track real gross domestic product (GDP).

What are the two ways that the GDP is calculated?

The expenditures approach and the income approach are the two methods that are typically used to calculate GDP. Each of these methods aims to come the closest to estimating the total economic value of all finished goods and services produced in an economy over a specific time frame.

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