The GDP deflator (implicit price deflator for GDP) is a measure of the level of prices in an economy for all new, domestically produced final goods and services. It is a price index that is calculated using nominal GDP and real GDP to measure price inflation or deflation.
Nominal GDP versus Real GDP
The market worth of all final commodities produced in a geographical location, generally a country, is known as nominal GDP, or unadjusted GDP. The market value is determined by the quantity and price of goods and services produced. As a result, if prices move from one period to the next but actual output does not, nominal GDP will vary as well, despite the fact that output remains constant.
Real gross domestic product, on the other hand, compensates for price increases that may have happened as a result of inflation. To put it another way, real GDP equals nominal GDP multiplied by inflation. Real GDP would remain unchanged if prices did not change from one period to the next but actual output did. Changes in real production are reflected in real GDP. Nominal GDP and real GDP will be the same if there is no inflation or deflation.
How do you use CPI to calculate GDP deflator?
Nominal/CPI x 100 is the formula. So a $100 television in 2017 would cost $70.59 in 1990 ($100/141.67=$70.59). You can use the percentage change formula to compute the amount of inflation between two deflators or CPIs. (new-old)/old x 100 is the formula.
How are the GDP deflator and real GDP calculated?
In general, real GDP is calculated by multiplying nominal GDP by the GDP deflator (R). For instance, if prices in an economy have risen by 1% since the base year, the deflated number is 1.01. If nominal GDP is $1 million, real GDP equals $1,000,000 divided by 1.01, or $990,099.
With an example, what is GDP deflator?
Assume a country’s nominal GDP is $10 billion and its real GDP is $8 billion. The GDP price deflator for the economy would be calculated as ($10 billion / $8 billion) times 100, or 125. As a result, from the base year to the current year, the overall level of prices grew by 25%.
Is the GDP deflator equivalent to the CPI?
The GDP implicit price deflator multiplies GDP’s current nominal-dollar value by its chained-dollar value. 12 The chained-dollar value is calculated by multiplying the change in the GDP quantity index by a base-period dollar value amount, which is calculated using a Fisher ideal index formula that aggregates component GDP quantity indexes. After calculating the component quantity indexes, the GDP quantity index can be determined, as well as the GDP implicit price deflator, which is obtained by dividing nominal GDP by real GDP. The GDP implicit price deflator changes at a rate that is roughly equal to the GDP price index. The GDP implicit price deflator has risen at a systematically lower rate than the CPI-U over time (2 percent annually for the GDP price index and implicit price deflator, versus 2.4 percent annually for the CPI-U), in part because the CPI-U uses a Laspeyres aggregation while the GDP implicit price deflator uses a Fisher ideal aggregation, as shown in figure 1.
Summary
Alternative measurements of inflation in the US economy include the CPI, GDP price index, and implicit price deflator. Which one to choose in a given circumstance is likely to be determined by the set of commodities and services in which one is interested as a price change measure. The CPI is a price index that analyzes price changes from the perspective of a city consumer and hence applies to products and services that are purchased out of pocket by city residents. The GDP price index and implicit price deflator track price changes in products and services produced domestically, and so apply to goods and services purchased by consumers, businesses, the government, and foreigners, but not importers. Furthermore, the formulas utilized to calculate these two measurements are not the same.
Without actual GDP, how do you calculate the GDP deflator?
We can calculate the actual GDP deflator now that we know both nominal and real GDP. To do so, multiply the result by 100 and divide nominal GDP by real GDP. This gives us the change in nominal GDP that cannot be attributable to changes in real GDP (from the base year). Take a look at the formula below:
Returning to our example, we can observe that the 2015 GDP deflator is 100 (*100). Because nominal and real GDP must be equal, the GDP deflator for the base year will always be 100. When we move ahead a few years, however, things start to get more intriguing. The GDP deflator for the year 2016 is 7 160.9 (*100). That is, the price level increased by 60.9 percent (160.9 100) from 2015 to 2016. Similarly, the GDP deflator for 2017 is 243.4, reflecting a 143.4 percent increase in price levels over the base year.
How is the chained dollar calculated using actual GDP?
Finally, the chain-type quantity index for a year is multiplied by the level of nominal GDP in the reference year and divided by 100 to estimate real GDP in (chained) dollar terms.
Is GDP deflator expressed as a percentage?
The GDP Deflator was introduced in the last module as an important aspect of our examination of GDP and economic growth. The GDP Deflator is the average price of all products and services that are included in GDP. The GDP Deflator is sometimes known as the GDP Price Index or the Implicit Price Deflator for GDP, although they all refer to the price index that is used to convert nominal to real GDP.
The consequences of inflation, which “inflate” the value of nominal GDP, distort it. By subtracting the effects of inflation, real GDP corrects for this misperception. As a result, real GDP is a more accurate measure of production across the economy. The percent change in real GDP is commonly used to gauge economic growth. Without the GDP deflator, neither of these measurements is conceivable.
Because the GDP deflator includes the prices of everything in GDP, the percentage change in the GDP Deflator is the most comprehensive indicator of inflation available, which is why economists favor it. Unlike the CPI, the GDP deflator does not employ set baskets of goods and services, but instead recalculates what each year’s GDP would have been worth using base-year prices.
What does the term “deflator” mean?
A deflator is a number in statistics that allows data to be assessed across time in terms of some base period, usually through a price index, to distinguish between changes in the money value of a gross national product (GNP) caused by price changes and changes caused by physical output changes. It is a metric for determining the price level for a specific amount. A deflator is a pricing index that eliminates the impacts of inflation. It refers to the discrepancy between nominal and real GDP.
The International Price Program’s import and export price indexes are utilized as deflators in national accounts in the United States. Consumption expenditures plus net investment plus government expenditures plus exports minus imports, for example, make up the gross domestic product (GDP). To make GDP estimates comparable over time, various price indexes are employed to “deflate” each component of GDP. Import price indexes are used to deflate the import component (i.e., import volume is divided by the Import Price index), while export price indexes are used to deflate the export component (i.e., export volume is divided by the Export Price index) (i.e., export volume is divided by the Export Price index).
It is most commonly used as a statistical technique to convert dollar purchasing power into “inflation-adjusted” purchasing power, allowing for price comparisons across historical periods while accounting for inflation.
What is the GDP deflator’s meaning?
The GDP deflator measures the cost of all final products and services generated by a country’s population, whereas the consumer price index measures the cost of final goods and services purchased by consumers.
Does the GDP deflator take into account imported goods?
The GDP deflator includes prices for investment items, government services, and exports, but excludes import costs.