What is a constant GDP dollar?

The constant dollar GDP is the way of measuring gross domestic product in terms of inflation of modified dollars. This is important because the currency value has changed over the years. To actually understand the country's GDP, it is important to create a reference year. This picture is sometimes called a real GDP or inflationary corrected GDP. Although it can provide valuable information about the country's economic status in a short time frame, it provides very little usable information for comparison over time as it does not take into account the effects of inflation.

Therefore, a constant GDP dollar is so important. The first step in determining the number is to determine the basic year, which will be the same as nominal GDP. From there, all the other years included in the study will require adjustment.

For example, if GDP for the country in 2005 was $ 10 billion in US dollars (USD) and inflation was 5%in 2006, then it would have to take it next yearto consider. If nominal GDP was $ 11 billion in 2006, at first glance it would seem to be an increase of 10%. However, given the increase in inflation, the actual GDP for 2006 would be $ 10,450,000,000 (USD), which is $ 11 billion. Therefore, a constant GDP dollar is determined that it increased by only 4.5%.

The selected basic year is often close in the middle of the data set under consideration. For example, if we compare this figure for years between 1980 and 2000, 1990 can be selected as a baseline. Although it is a common practice, there is no set rule for the selection of the year.

Constant GDP dollar can often indicate whether the standard life in the country has improved over time. The theory is that if the country has an increased level of economic production, its citizens will naturally benefit. On the other hand, if the country has contraction in economic activities, its citizens are likely to experience harmful effects. This is a generalization that may not apply in all cases.