Real GDP Per Capita Formula

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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.

Formula to Calculate Real GDP Per Capita

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.
It is frequently used throughout the world to compare the average living standards of different nations throughout time.
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

Where,

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

Steps to Calculate Real GDP Per Capita

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

First, one needs to calculate Nominal GDP either by using income, expenditure, or production methods.
Find out the deflator which the government of that economy shall provide.
Now divide the nominal GDP computed in step 1 by the deflator gathered in step 2 to arrive at Real GDP.
From statistical and census reports, one can find out the country's population.
The final step is to divide the real GDP by the population yield real GDP per capita.

Examples

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,

= ($450,000,000,000 / (1 + 25%)/100,000,000

Example #2

MCX is a developed economy 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

Nominal GDP Formula = 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,

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

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 capita. Below are the details that she has collected.

If the difference in the GDP per capita 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,

=12378966788.00/(1+12%)/10788900.00

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

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:

Investment Amount = 37369543.45

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

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.