onomic factors: inflation. Thus GDP is often restated in terms of a base year (or in constant dollars) so that the inflation factor can be taken into account. In this way, so called real GDP can be used to reveal changes in economic output after adjusting for inflation.
Even real GDP does not provide an absolute indication of whether an economy is improving or suffering a downturn, however. For example, strong economic growth following a recession may simply indicate that slack capacity is being put back into use rather than new capacity being created. Strong growth when the economy is already strong may indicate that the economy is expanding capacity, but may also increase fears of inflation (Beckner, 1999, p. 20).
Factors Which Real GDP Does Not Address
Although GDP takes a wide range of activities into account, there are some factors which are not included. Transfer payments, such as those from pensions and Social Security, are not included in GDP. Similarly, gifts are
...