What is the Real Economy?

C. Daw
C. Daw
Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

To study the economy of a country or region, one must begin by looking at all of the activities that are involved in the production, distribution and consumption of goods and services. The economy is constantly being studied and it is used to make future predictions, set interest rates, and plays a role in setting prices for goods and services. There are many methods, theories and models that are used to study and interpret the economy. One such method is the real economy which is used to specifically account for the factor of inflation or deflation into the economy.

When studying the real economy of a country, a better view of real goods and services are seen at a constant dollar value without the interference of inflation. Inflation is the rise or decrease, or deflation, of goods and services during a certain time frame. This rise in the cost of goods and services is measured by two common methods, including the Consumer Price Index and The Producers Price Index. By making economic calculations based on the real economy, business owners are better able to determine the real value of their goods and services. This view gives business owners a better understanding of the change in their goods and/or services over several years, which can look skewed when inflation is factored in.

Real values allow economists to compare goods and services at many different points in time and the value of the dollar will not play a part in the calculation. A real value must always be used as a comparison between two or more points of time, because a single real value does not provide any information. However, when an economist or business manager wants to know the reality of how well their product or service has progressed between different points of time, the real economy is the best way to make this analysis. They will be better able to calculation their real income.

The real economy is used to evaluate the real economic growth rate for a country or region. The real economic growth rate is a percentage that is determined to measure how the economy has grown or reduced from one period to the next. Many economists look toward this growth rate to see a true analysis that is not distorted by the inflation or deflation changes that constantly occur through time. This helps determine how much the nation’s gross domestic product changes from year to year and helps make better predictions about the country’s economic future.

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