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.
Without actual GDP, how do you calculate the 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.
What exactly does the GDP deflator mean?
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 purpose of the GDP deflator?
The GDP price deflator is a tool for determining how much prices have risen over time. This is essential because, as we saw in the last example, comparing GDP from two years can produce a misleading conclusion if the price level has changed between the two.
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.
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.
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 distinguishes the CPI from the GDP deflator?
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.
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.
Quizlet: What does the GDP deflator reflect?
The consumer price index measures prices for specific products and services purchased by consumers, while the GDP deflator shows prices for all goods and services produced domestically.