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DEFLATOR

The GDP deflator is used to convert nominal GDP to real GDP by accounting for inflation. It is calculated as the ratio of nominal GDP to real GDP. The GDP deflator measures price changes for all goods and services produced in an economy, unlike the CPI or WPI which are based on limited baskets. It helps show how much a change in GDP is due to price changes versus output changes, and reflects current expenditure patterns in the economy. The GDP deflator is a comprehensive measure of inflation for an economy.

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77 views5 pages

DEFLATOR

The GDP deflator is used to convert nominal GDP to real GDP by accounting for inflation. It is calculated as the ratio of nominal GDP to real GDP. The GDP deflator measures price changes for all goods and services produced in an economy, unlike the CPI or WPI which are based on limited baskets. It helps show how much a change in GDP is due to price changes versus output changes, and reflects current expenditure patterns in the economy. The GDP deflator is a comprehensive measure of inflation for an economy.

Uploaded by

Shreya
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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DEFLATOR FOR GDP

DEFINITION
Price index is measure of average level of prices for some specified set of goods and services , relative to
prices in a specified base year.

Like one of the price index is GDP deflator : it is amount by which nominal GDP should be divided or
deflated to obtain real GDP.

The GDP price deflator measures the changes in prices for all of the goods and services produced in an
economy.

The GDP deflator shows how much a change in GDP relies on changes in the price level.
CALCULATION
Ratio of nominal GDP to real GDP

GDP Deflator= (Nominal GDP / Real GDP )

Where , Nominal GDP : measured at current prices , unadjusted for inflation and Real GDP: measured by
using constant set of prices /prices of base year
IMPORTANCE
It helps to convert nominal GDP to real GDP .
Since one of the drawback of nominal GDP is that since the prices increase from one year to another –
it is difficult to estimate whether qty of goods and services increased or not .
This ratio helps show the extent to which the increase in gross domestic product has happened on
account of higher prices rather than increase in output.
It reflects the prices of all domestically produced goods and services in the economy compared to CPI
or WPI since they are based on a limited basket of goods and services thereby not representing the
entire economy.
It includes prices of investment goods, government services, and exports while excluding prices of
imports. WPI, for instance, does not consider the service sector.
APPLICATION
It is implicit price deflator - It is a more comprehensive measure of inflation.
Since the deflator covers the entire range of goods and services produced in the economy — as against the
limited commodity baskets for the wholesale or consumer price indices. GDP deflator is not based on a fixed
basket of goods and services.
GDP deflator captures any changes in an economy's consumption or investment patterns.
GDP deflator reflects up to date expenditure patterns. For instance, if the price of chicken increases relative
to the price of beef, people may spend more money on beef as a substitute for chicken.
 It helps to estimate production in next year as if there would be overproduction – leading to inventory
problems and if there would be under production - it will lead to competitors going ahead .

We can calculate inflation rate for year n using GDP deflator :
{GDP DEFLATOR for Year n – GDP DEFLATOR for Year (n-1)}/ GDP DEFLATOR for Year (n-1) X 100

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