GDP deflator – All the Things You Need to Know
GDP deflator measures the impact of inflation on GDP. The GDP deflator formula is the ratio between the nominal GDP and real GDP, multiplied by 100
What is GDP deflator?
GDP deflator measures the impact of inflation on GDP. In other words, the GDP deflator is an economic measurement to determine the changes of the prices of goods and services rather than the total output that an economy produces. So, using the GDP deflator we compare the nominal value of goods and services are produced and delivered in a particular year vs value of these goods and services in the base year.
The GDP deflator is also known as the GDP price deflator or implicit price deflator.
How do you calculate the GDP deflator?
The GDP deflator is calculated using the GDP deflator formula.
GDP Deflator Formula / Implicit Price Deflator Formula
The GDP deflator formula is the ratio between the nominal GDP and real GDP, multiplied by 100. The GDP formula can be presented as follows.
Here,
Nominal GDP means the current monetary value of the produced final goods and services within an economy.
The real GDP means the value of the GDP using on the predetermined base market prices.
According to the above real GDP formula, GDP deflator is very helpful to remove the impact of the inflation in nominal GDP to get the value of real GDP. Real GDP is very important to economists to determine the economic growth of a country. Because real GDP is free from price changes.
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Nominal Vs Real GDP – Complete Lesson
GPP Deflator Calculator
Other than the GDP deflator formula, we can calculate the GDP deflator using a GDP deflator calculator. It is very easy. You have to type the values of the real GDP and nominal GDP then the GDP deflator calculator calculates the GDP deflator value.
GDP Deflator Example
Let’s assume that the GDP deflator of the USA is calculated using the 2010 prices as the base year prices. So, the GDP deflator for the year 2010 was 100. We assume that for the year 2022, the Nominal GDP of the USA was USD 500bn. But the real GDP based on the constant prices of 2010, was USD 465bn. The GDP Deflator for 2016 is,
GDP deflator = USD 500bn / USD 465bn x 100 = 107.53
So, GDP deflator for the year 2022 is 107.53
GDP Deflator vs CPI
1. GDP Deflator considers the prices of all the goods and services produced within a country (domestically). But the Consumer Price Index considers the prices of the basket of goods and services bought by a representative customer.
2. GDP deflator data is released quarterly or yearly. So, the GDP deflator can determine only quarterly or yearly inflation changes. But CPI data is available monthly. So, CPI can determine not only quarterly or yearly inflation changes but also monthly inflation changes.
3. When the GDP deflator is calculated, both private and public goods are included. When CPI is calculated, only private goods are included.
4. GDP deflator includes domestic values of the goods and services. But CPI includes domestic and non-domestic products (international goods) bought by consumers.
5. The GDP deflator is based on the changing commodities from year to year. But CPI is based on a fixed basket of goods.
GDP Deflator vs CPI – Table
