GDP Deflator Flashcards

GDP Deflator

• The GDP deflator measures the overall level of prices.

• Definition:

  • The economy’s inflation rate can be measured by computing the percentage increase in the GDP deflator from one year to the next.

GDP Deflator Formula

The GDP deflator is calculated as:

GDP \space deflator = 100 \times \frac{Nominal \space GDP}{Real \space GDP}

Example Calculation

Here's how to compute the GDP deflator for the years 2011, 2012, and 2013:

• 2011:

  • Nominal GDP: 6000

  • Real GDP: 6000

  • GDP Deflator: 100 \times (6000/6000) = 100.0

• 2012:

  • Nominal GDP: 8250

  • Real GDP: 7200

  • GDP Deflator: 100 \times (8250/7200) = 114.6

• 2013:

  • Nominal GDP: 10,800

  • Real GDP: 8400

  • GDP Deflator: 100 \times (10,800/8400) = 128.6

• The inflation rate from 2012 to 2013 is 12.2%

Active Learning Example

Consider an economy with two goods, A and B. We are given the prices (P) and quantities (Q) for the years 2011 (base year), 2012, and 2013.

• A. Compute nominal GDP in 2011.

  • Nominal GDP in 2011 = (30 \times 900) + (100 \times 192) = $46,200

• B. Compute real GDP in 2012 (using 2011 as the base year).

  • Real GDP in 2012 = (30 \times 1000) + (100 \times 200) = $50,000

• C. Compute the GDP deflator in 2013.

  • Nominal GDP in 2013 = (36 \times 1050) + (100 \times 205) = $58,300

  • Real GDP in 2013 (using 2011 prices) = (30 \times 1050) + (100 \times 205) = $52,000

  • GDP deflator in 2013 = 100 \times (58,300/52,000) = 112.1

GDP Deflator vs. CPI

• GDP deflator

  • Ratio of nominal GDP to real GDP.

  • Reflects prices of all goods & services produced domestically.

  • Compares the price of currently produced goods and services domestically to the price of the same goods and services in the base year.

• CPI

  • Reflects prices of goods & services bought by consumers.

  • Compares the price of a fixed basket of goods and services bought by a typical consumer to the price of the basket in the base year.

Inflation Measures

The inflation rate as measured by the GDP deflator and the Consumer Price Index (CPI) generally move together.