GDP (Gross Domestic Product) is the main macroeconomic indicator that determines the results of economic activity. The GDP deflator is a price index that reflects the change in the prices of the consumer basket over a certain period of time.
Instructions
Step 1
The GDP deflator is one of the most common indicators for calculating the consumer price index, which reflects the inflation rate in the country. The GDP deflator is based on the size of the consumer basket of the current period, but not the base one. Thus, the GDP deflator is also considered to be the Paasche index.
Step 2
The GDP deflator includes final consumer products, goods and services accounted for in GDP. When calculating GDP, discard all indicators that characterize goods purchased in previous years and goods that are intermediate in the manufacture of the final product. For example, food prepared at home and dinner prepared in a restaurant. Both dishes can be exactly the same, but the final product, the cost of which determines the level of GDP, will be dinner from a restaurant.
Step 3
The calculation of GDP is based on the following principle: "Everything that is produced in the country will definitely be sold." Thus, the simplest calculation of GDP occurs by adding up all the amounts spent by consumers on the purchase of the final product produced. In other words, GDP can be represented as the sum of all expenditures required to buy back all goods produced in the market.
Step 4
The GDP deflator is the ratio of nominal to real GDP, expressed as a percentage. The calculation formula is as follows:
GDP deflator = Nominal GDP / Real GDP * 100%.
Step 5
Nominal GDP is expressed in current prices for a given period, and real GDP in prices of the base year, which are constant. The base year can be selected as the previous year for the current period, or any other. Comparison of a later year with the current (early) year is used to compare historical events with a given, present situation. Calculating, for example, the real GDP of 1970 in 1990 prices, 1990 will be the base year, while 1970 will be the current one.
