... when the total output of goods and services increases, i.e. GDP rises. However, an increase in GDP can simply be caused by an increase in prices rather than an increase in output, therefore to measure economic growth GDP must be adjusted for the effects of inflation. Inflation-adjusted GDP is called real GDP, which should be measured by measuring total output at constant and not changing prices, and it is computed by dividing nominal GDP (current price GDP) by the relevant price index. Since real GDP only measures real changes in output it is a useful indicator for the performance of an economy. Changes in real GDP have a direct impact on our material standard of living, and the figures are often used by politicians to represent any progress in social welfare. GDP is a crude measure, which suggests that a higher total output will bring better living standards to ...

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