GDP deflator

(noun)

A measure of the level of prices of all new, domestically produced, final goods and services in an economy. It is calculated by computing the ratio of nominal GDP to the real measure of GDP.

Related Terms

Examples of GDP deflator in the following topics:

  • The GDP Deflator

    • The GDP deflator is a price index that measures inflation or deflation in an economy by calculating a ratio of nominal GDP to real GDP.
    • If there is no inflation or deflation, nominal GDP will be the same as real GDP.
    • The GDP deflator is calculated by dividing nominal GDP by real GDP and multiplying by 100 .
    • Consider a numeric example: if nominal GDP is $100,000, and real GDP is $45,000, then the GDP deflator will be 222 (GDP deflator = $100,000/$45,000 * 100 = 222.22).
    • In the U.S., GDP and GDP deflator are calculated by the U.S.

  • Defining and Calculating CPI

    • The GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy.
    • Unlike the CPI, the GDP deflator is a measure of price inflation or deflation for a specific base year.
    • The GDP deflator differs from the CPI because it is not based on a fixed basket of goods and services.
    • The GDP deflator "basket" changes from year to year depending on people's consumption and investment patterns.
    • Unlike the CPI, the GDP deflator is not impacted by substitution biases.

  • Calculating Real GDP

    • Real GDP growth is the value of all goods produced in a given year; nominal GDP is value of all the goods taking price changes into account.
    • The GDP is the officially recognized totals.
    • $GDP = C + I + G + (X - M)$
    • Real GDP, therefore, accounts for the fact that if prices change but output doesn't, nominal GDP would change.
    • Real GDP accounts for inflation and deflation.

  • Limitations of Monetary Policy

    • Limitations of monetary policy include liquidity traps, deflation, and being canceled out by other factors.
    • Deflation is a decrease in the general price level of goods and services.
    • Deflation occurs when the inflation rate falls below 0%.
    • If monetary policy is too contractionary for too long, deflation could set in.
    • Sometimes, when the money supply is increased, as shown by the Liquidity Preference-Money Supply (LM) curve shift, it has no impact on output (GDP or Y) or on interest rates.

  • Deflation

    • Deflation is a decrease in the general price levels of goods and services.
    • Deflation is a decrease in the general price levels of goods and services.
    • And if there is deflation, $105 next year buys more than $105 does today.
    • Thus, deflation discourages borrowing, and by extension, consumption and investment today.
    • There are several theories about the causes of deflation.

  • Macroeconomics

    • Price stability occurs when prices remain largely stable and there is not rapid inflation or deflation.
    • These models rely on aggregated economic indicators such as GDP, unemployment, and price indices.

  • GDP per capita

    • Gross domestic product (GDP) per capita is also known as income per person.
    • GDP per capita is calculated by dividing GDP by the total population of the country.
    • It is useful because GDP is expected to increase with population, so it may be misleading to simply compare the GDPs of two countries.
    • GDP per capita accounts for population size.
    • Define GDP per capita and assess its usefulness as a metric.

  • Calculating GDP

    • GDP can be calculated through the expenditures, income, or output approach.
    • The sum of net value added in various economic activities is known as GDP at factor cost.
    • GDP at factor cost plus indirect taxes less subsidies on products is GDP at producer price.
    • GDP at producer price theoretically should be equal to GDP calculated based on the expenditure approach.
    • GDP is a common measure for both inter-country comparisons and intra-country comparisons.

  • Evaluating GDP as a Measure of the Economy

    • The value of GDP as a measure of the quality of life for a given country may be limited.
    • Therefore, growth could be misinterpreted by looking at GDP values in isolation.
    • The sensitivities related to social welfare has continued the argument specific to the use of GDP as a economic growth or progress metric.
    • Although GDP provides a single quantitative metric by which comparisons can be made across countries, the aggregation of elements that create the single value of GDP provide limitations in evaluating a country and its economic agents.
    • Assess the uses and limitations of GDP as a measure of the economy

  • Arguments For and Against Inflation Targeting Policy Interventions

    • Likewise, when consumers expect deflation they tend to save their money, delaying consumption until prices fall.
    • Adherents of market monetarism, for example, argue that targeting a nominal national income (nominal GDP) would be more effective than targeting inflation.