GDP Deflator
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GDP, gross domestic product, deflator is a method to mensurate the price change of all new domestic goods and services in the economic system. It gives the net value of all goods and services procured over a specific time.
Like consumer price index, GDP deflator doesn’t rely upon a constant market basket. The basket is changeable, so new consumption patterns can be shown through this deflator according to the people’s reaction to the changing market prices.
Interpretation:
The GDP deflator can be depicted mathematically by this equation given below:
GDP deflator = ( Nominal GDP / Real GDP)*100.
Nominal GDP: In a nominal GDP, inflation is not taken into account or consideration. It is evaluated on the basis of the current market price.
Real GDP: Real GDP is computed by taking the market price of some base year.By measuring t the nominal GDP of a base year price level 2 the real GDP is calculated. Real values are adjusted for different price level in a year.
By dividing the nominal GDP with GDP deflator, the real GDP is computed, and hence, deflates the nominal GDP. Actually, the difference between the deflator and a price index, like the CPI, is not huge. GDP deflator almost gives the accurate measurement of changing prices in the overall economy.
GDP Deflator vs Hedonics:
The hedonic price index of a specific good depends a lot upon it’s different characteristics. For example, goods like computer’s price can be determined by it’s RAM size, CPU speed etc. So if the prices of these things change, then the price of the computer will also change accordingly. Therefore the hedonic price index will shift as well. But by avoiding this complicated hedonic price index, one can simply rely upon the GDP deflator which will calculate the escalation of those values with lesser intricacy.
Utility:
- The GDP deflator can be seen as a conversion factor that transfigure the Real GDP into Nominal GDP.
- GDP deflator gives the construction of an implicit index of price level for one year.
- It is used to calculate the rate of inflation or deflation.
