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How to calculate GDP deflator?

Published in GDP Deflator Calculation 3 mins read

The GDP deflator is calculated by dividing the nominal GDP by the real GDP and then multiplying the result by 100. Nominal GDP represents the total value of goods and services produced during a specific period, while real GDP accounts for inflation.

Here's a breakdown of the calculation:

  1. Determine Nominal GDP: Calculate the total value of all goods and services produced in a country at current prices.
  2. Determine Real GDP: Calculate the total value of all goods and services produced in a country using a base year's prices to adjust for inflation.
  3. Divide Nominal GDP by Real GDP: Divide the nominal GDP by the real GDP.
  4. Multiply by 100: Multiply the result of the division by 100 to express the GDP deflator as an index number.

The formula for calculating the GDP deflator is:

GDP Deflator = (Nominal GDP / Real GDP) * 100

Example

Let's say in 2023:

  • Nominal GDP = $25 trillion
  • Real GDP = $20 trillion

Then, the GDP deflator would be:

GDP Deflator = ($25 trillion / $20 trillion) * 100 = 125

This indicates that the price level has increased by 25% compared to the base year.

Understanding the Components

  • Nominal GDP: This is the market value of all goods and services produced in a country, unadjusted for inflation.
  • Real GDP: This is the market value of all goods and services produced in a country, adjusted for inflation. It provides a more accurate measure of economic growth.

Why is the GDP Deflator Important?

The GDP deflator is a comprehensive measure of inflation in an economy. It reflects the change in prices for all goods and services produced domestically, unlike the Consumer Price Index (CPI), which only measures the price changes of a basket of goods and services purchased by households.

Feature GDP Deflator Consumer Price Index (CPI)
Scope Measures price changes for all goods and services produced domestically. Measures price changes for a basket of goods and services purchased by households.
Goods Included Includes all goods and services that contribute to GDP. Includes only goods and services typically bought by consumers.
Import Impact Changes in import prices are reflected in the GDP deflator. Significantly affected by changes in import prices because of consumer goods.
Formula (Nominal GDP / Real GDP) * 100 Complex formula based on weighted average price changes of specific consumer goods.

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