GDP deflator

# GDP deflator

Discussion

Encyclopedia
In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, the GDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. GDP stands for gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....

, the total value of all final goods and services produced within that economy during a specified period.

### Measurement in national accounts

In most systems of national accounts
National accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...

the GDP deflator measures the ratio of nominal (or current-price) GDP to the real (or chain volume) measure of GDP. The formula used to calculate the deflator is:

Dividing the nominal GDP by the GDP deflator and multiplying it by 100 would then give the figure for real GDP
Real GDP
Real Gross Domestic Product is a macroeconomic measure of the value of output economy adjusted for price changes . The adjustment transforms the money-value measure, called nominal GDP, into an index for quantity of total output...

, hence deflating the nominal GDP into a real measure.

It is often useful to consider implicit price deflators for certain subcategories of GDP, such as computer hardware. In this case, it is useful to think of the price deflator as the ratio of the current-year price of a good to its price in some base year. The price in the base year is normalized to 100. For example, for computer hardware, we could define a "unit" to be a computer with a specific level of processing power, memory, hard drive space and so on. A price deflator of 200 means that the current-year price of this computing power is twice its base-year price - price inflation. A price deflator of 50 means that the current-year price is half the base year price - price deflation. This can lead to a situation where official statistics reflect a drop in prices, even though they have stayed the same. Consider the example of the computer. From year to year, assume that the price of a new computer stays the same, but the computing power doubles. This would result in a price deflator of 50, though the consumer would have to spend the same amount of money on both systems.

Unlike some price index
Price index
A price index is a normalized average of prices for a given class of goods or services in a given region, during a given interval of time...

es (like the CPI
CPI
A consumer price index is a measure of the average price of consumer goods and services purchased by householdsCPI may also stand for:*Central Port Injection, see fuel injection...

), the GDP deflator is not based on a fixed basket
The term market basket or commodity bundle refers to a fixed list of items used specifically to track the progress of inflation in an economy or specific market....

of goods and services. The basket is allowed to change with people's consumption and investment patterns. (Specifically, for GDP, the "basket" in each year is the set of all goods that were produced domestically, weighted by the market value of the total consumption of each good.) Therefore, new expenditure patterns are allowed to show up in the deflator as people respond to changing prices. The theory behind this approach is that the GDP deflator reflects up to date expenditure patterns. For instance, if the price of chicken increases relative to the price of beef, it is claimed that people will likely spend more money on beef as a substitute for chicken.

In practice, the difference between the deflator and a price index like the Consumer price index
Consumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...

(CPI) is often relatively small. On the other hand, with governments in developed countries increasingly utilizing price indexes for everything from fiscal and monetary planning to payments to social program recipients, the even small differences between inflation measures can shift budget revenues and expenses by millions or billions of dollars.

### United States

The GDP and GDP deflator are calculated by the US Bureau for Economic analysis

### United Kingdom

The GDP and GDP deflator series are published by the Office for National Statistics
Office for National Statistics
The Office for National Statistics is the executive office of the UK Statistics Authority, a non-ministerial department which reports directly to the Parliament of the United Kingdom.- Overview :...

.

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