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Q. Construction of real gross domestic product ?
To be able to make reasonable comparisons of GDP over time, we should adjust for inflation. For instance, if prices are doubled over one year then GDP will double although exactly the same services and goods are produced as the year before. To remove the effect of inflation we divide GDP by a price index and we define real GDP as GDP divided by a price index.
It isn't very common to use CPI in the construction of real GDP. The reason is that CPI measures price evolution of consumer goods whereas GDP includes investment goods and consumer goods. In place of it's common to use a GDP deflator as a price index. GDP deflator measures the price evolution of a basket whose composition is close to composition of GDP. Difference between CPI and GDP deflator is fairly small though. To avoid confusion, GDP which is not adjusted for inflation is frequentlyknown as nominal GDP.
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