Real GDP Per Capita: Definition & Formula

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

There are many different ways that economists measure a nation's wealth. In this lesson, you'll learn the definition and meaning of one such metric - real GDP per capita. After finishing the lesson, you can check your understanding with a short quiz.

Real GDP

Before we talk about calculating real GDP per capita, we need to make sure we understand real GDP. GDP, or gross domestic product, is the value of all the goods and services produced by a nation. It can be measured over any time period, but is usually reported quarterly and annually.

GDP is usually discussed as nominal or current, which means it is calculated based on the value of the currency during the time period it is being measured. This creates a problem when comparing the GDP of two different time periods. Because prices increase over time, two time periods when the same volume of output was produced could appear very different, based on prices.

Let's look at an example that we'll use throughout this lesson. To keep the math simple so we can focus on the concepts, our country has 25 people. Fifty years ago, oil was $10 a barrel and our country produced 10,000 barrels of oil. That year, GDP was $100,000 - the 10,000 barrels of oil times the $10 price per barrel.

Twenty-five years later, oil had risen to $50 per barrel, but our country still produced 10,000 barrels. GDP has risen to $500,000 now - again, the 10,000 barrels times the $50 price per barrel. Why was GDP so much higher after 25 years? Because prices had increased because of inflation.

When we calculate GDP in real terms, we base each year's GDP on the value of the dollar in our chosen base year (usually the current year). If we wanted to calculate the GDP from 25 years ago in our example above into real terms, we would use today's prices to value the output 25 years ago. Because output was the same both years (10,000 barrels), valuing each year's outputs in today's dollars makes the real GDP $500,000 for each year.

Per Capita

Don't worry, per capita is much easier to understand than real GDP! Per capita is a Latin phrase that means 'for each head' - or per person. Whenever any group metric is quoted 'per capita' it simply means the average per person.

If we return to our early example, our country had real GDP of $500,000. You'll also remember our country had 25 people. We can calculate real GDP per capita by solving the following formula:

Real GDP Example

So in our little country, the real GDP per capita is $20,000.

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