- The GDP deflator is a price inflation indicator. It’s computed by multiplying Nominal GDP by Real GDP and then dividing by 100. (This is based on the formula.)
- The market value of goods and services produced in an economy, unadjusted for inflation, is known as nominal GDP. To reflect changes in real output, real GDP is nominal GDP corrected for inflation.
- The GDP deflator’s trends are similar to the Consumer Price Index, which is a different technique of calculating inflation.
Key Terms
- GDP deflator: A measure of the level of prices in an economy for all new, domestically produced final products and services. The ratio of nominal GDP to the real measure of GDP is used to compute it.
- A macroeconomic measure of the worth of an economy’s output adjusted for price fluctuations is known as real GDP (inflation or deflation).
- Nominal GDP is a non-inflationary macroeconomic measure of the value of an economy’s output.
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.
How do you compute the GDP deflator and give an example?
Calculation of the GDP Price Deflator 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%.
What is the price deflator for GDP?
The GDP deflator, also known as the implicit price deflator, tracks changes in the prices of goods and services produced in the United States, including those exported to other nations. Import prices are not included.
How are the GDP deflator and CPI calculated?
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. The amount of inflation would be 20% if the CPI increased from 125 to 150. 20 percent = 150-125/125 100
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.
In Excel, how do you calculate GDP deflator?
Let us consider a simple economy with a nominal GDP of $5.65 million (at current prices) and a real GDP of $4.50 million (at constant prices of the base year 2014) in the year 2019. Calculate the economy’s GDP deflator.
As a result, the GDP deflator for the economy for the year 2019 was 125.56.
GDP Deflator Formula Example #2
Let’s look at some random products, such as product X and product Y. The following data on product production quantity and prices for the previous three years is provided, with 2016 as the base year. Calculate the GDP deflator for the years 2016, 2017, and 2018 using the information provided.
Is the GDP deflator the same as the rate of inflation?
The GDP deflator is the difference between the two years’ inflation ratesthe amount by which prices have risen since 2016. The deflator is named after the percentage that must be subtracted from nominal GDP to obtain real GDP.
What is the difference between the Consumer Price Index and the GDP Deflator?
The final distinction is in how the two metrics combine the various prices in the economy. The CPI or RPI gives set weights to different goods’ prices, whereas the GDP deflator gives fluctuating weights. To put it another way, the CPI or RPI is calculated using a fixed basket of products, but the GDP deflator permits the basket of items to change over time as GDP composition changes. Consider an economy that only produces and consumes apples and oranges to show how this works.
Both the CPI and the GDP deflator compare the cost of a basket of products today to the cost of the same basket in the base year, as shown by these equations. The only difference between the two is whether the basket changes over time. The CPI is calculated using a set basket, but the GDP deflator is calculated with a variable basket. The following example illustrates the differences between both approaches.
Consider what happens if heavy frosts wipe out the nation’s orange crop: the number of oranges produced drops to zero, and the price of the few oranges that remain skyrockets. The increase in the price of oranges is not reflected in the GDP deflator since oranges are no longer included in GDP.
What exactly is a chain deflator?
An economic indicator that is used to measure consumer product prices. Unlike the Consumer Price Index (CPI), the Chain Deflator’s survey basket of commodities varies with consumer buying behavior on a regular basis. Month to month, it might be extremely erratic. Investors and economists monitor the development on a quarterly basis for signals of inflation. The Chain Deflator is part of the Bureau of Economic Analysis’ monthly Gross Domestic Product (GDP) report, which is released in the last week of the month. It is available on the BEA’s Web site and is reported on numerous financial news and research Web sites.