Question:
If growth rate is measured as % of GDP, and inflation is also measured as % of GDP, wouldn't a growth rate of 2% be completely offset by a 2% inflation rate for the same period? That is, the GDP would experience 0% effective increase?Answer:
Hello, and thank you for sending us a question! The GDP growth rate is measured relative to last year’s GDP. Usually the Growth numbers that make headlines on the news are of what economists usually call “Real GDP,” meaning that it is already corrected for changes in prices (inflation). The measure of GDP at current prices (meaning that it is not adjusted for inflation) is usually called “Nominal GDP.” So your intuition is correct in that if we looked at the growth for the Nominal GDP, that is without correcting for inflation, we could fool ourselves by believing that we were “richer” as a country since Nominal GDP is growing when in fact the only change that happened was to the prices in the economy. So if nominal GDP had grown by 2% and inflation was at 2% we would (approximately) have zero Real GDP growth, as you said.
Thankfully, economists and statisticians realized that could happen and developed ways to measure the Real GDP, which reflects actual growth in terms of the goods and services that are produced in our economy and available to make our lives better.
Be careful though with one detail in your question, since the Inflation rate actually is measured not relative to the GDP but is the change in the level of PRICES relative to the previous year’s Prices.