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 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%.
How are the GDP deflator and CPI calculated?
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.
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.
What is the formula for GDP?
Gross domestic product (GDP) equals private consumption + gross private investment + government investment + government spending + (exports Minus imports).
GDP is usually computed using international standards by the country’s official statistical agency. GDP is calculated in the United States by the Bureau of Economic Analysis, which is part of the Commerce Department. The System of National Accounts, compiled in 1993 by the International Monetary Fund (IMF), the European Commission, and the Organization for Economic Cooperation and Development (OECD), is the international standard for estimating GDP.
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 does the GDP deflator include?
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.
What is the link between the GDP deflator and the Consumer Price Index?
The GDP deflator is a measure of the economy’s overall price change. While the CPI solely measures price changes in consumer goods and services, the GDP deflator includes price changes in government spending, investment, and commodities and services exports and imports.
How is the GDP deflator used to calculate inflation?
The deflator for the Gross Domestic Product (GDP) is a measure of overall price inflation. It’s determined by dividing nominal GDP by real GDP and multiplying by a factor of 100. The market value of goods and services produced in an economy, unadjusted for inflation, is known as nominal GDP (It is the GDP measured at current prices).