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    GDP Deflator

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    Vivek Vashistha
    This document discusses how to calculate nominal GDP, real GDP, and the GDP deflator to account for inflation. Nominal GDP is the total value of goods and services using current prices, while real GDP uses base year prices to eliminate inflation. The GDP deflator measures inflation as the ratio of nominal GDP to real GDP. Calculating these measures allows analysis of economic growth by separating changes due to quantity from changes due to price levels.

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    GDP Deflator

    Uploaded by

    Vivek Vashistha
    52 views22 pages
    This document discusses how to calculate nominal GDP, real GDP, and the GDP deflator to account for inflation. Nominal GDP is the total value of goods and services using current prices, while real GDP uses base year prices to eliminate inflation. The GDP deflator measures inflation as the ratio of nominal GDP to real GDP. Calculating these measures allows analysis of economic growth by separating changes due to quantity from changes due to price levels.

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    This document discusses how to calculate nominal GDP, real GDP, and the GDP deflator to account for inflation. Nominal GDP is the total value of goods and services using current prices, while real GDP uses base year prices to eliminate inflation. The GDP deflator measures inflation as the ratio of nominal GDP to real GDP. Calculating these measures allows analysis of economic growth by separating changes due to quantity from changes due to price levels.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    52 views22 pages

    GDP Deflator

    Uploaded by

    Vivek Vashistha
    This document discusses how to calculate nominal GDP, real GDP, and the GDP deflator to account for inflation. Nominal GDP is the total value of goods and services using current prices, while real GDP uses base year prices to eliminate inflation. The GDP deflator measures inflation as the ratio of nominal GDP to real GDP. Calculating these measures allows analysis of economic growth by separating changes due to quantity from changes due to price levels.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 22

    Calculating GDP

    NOMINAL GDP, REAL GDP, AND THE GDP DEFLATOR


    There are two ways that GDP can
    increase:
    1. An increase in the PRICES of goods and services.
    2. An increase in the QUANTITY of goods and services.

    We need a method to calculate GDP that addresses rising prices


    Our Simple Economy

     Suppose an economy produces three goods or services,


    Window Washing, Baseballs, and Hammers. Data for the
    past three years can be found below.
    Prices and Quantities for our
    Simple Economy
    Nominal GDP

    Step 1: Calculate Nominal GDP (The value of final goods and


    services evaluated at current-year prices) for each year:

    NGDP2006 = Q2006 x P2006

    = (90 x $50.00) Window Washing

    + (75 x $2.00) Baseballs

    + (50 x $30.00) Hammers

    = $6,150
    Nominal GDP 2007

    NGDP2007 = Q2007 x P2007


    = (100 x $60.00) Window Washing
    + (100 x $2.00) Baseballs
    + (50 x $25.00) Hammers
    = $7,450
    Nominal GDP 2008

    NGDP2008 = Q2008 x P2008


    = (100 x $65.00) Window Washing
    + (120 x $2.25) Baseballs
    + (65 x $25.00) Hammers
    = $8,395
    Real GDP

     Step 2: Calculate Real GDP (The value of final goods and


    services evaluated at base-year prices) for each year. For
    our example assume 2006 is the base year. This means that
    all values are in what we call “2006 Dollars”, or “Constant
    Dollars”.
    Real GDP

     By using the prices from the base-year, (or holding prices


    constant over time), we eliminate the impact that rising
    prices have on GDP, to get a measure of “Real” economic
    activity.
    Real GDP in 2006

    RGDP2006 = Q2006 x P2006


    = (90 x $50.00) Window Washing
    + (75 x $2.00) Baseballs
    + (50 x $30.00) Hammers
    = $6,150
    Note: For the Base-Year Nominal GDP always equals Real
    GDP
    Real GDP in 2007

    RGDP2007 = Q2007 x P2006


    = (100 x $50.00) Window Washing
    + (100 x $2.00) Baseballs
    + (50 x $30.00) Hammers
    = $6,700

    Note: We use “Current Quantities” and


    “Constant Prices”.
    Real GDP in 2008

    RGDP2008 = Q2008 x P2006


    = (100 x $50.00) Window Washing
    + (120 x $2.00) Baseballs
    + (65 x $30.00) Hammers
    = $7,190

    Note: We still use “Current Quantities” and


    “Constant Prices”.
    The General Formula for
    Calculating a Growth Rate
    New _ Value  Old _ Value
    Percent _ Change  %   100
    Old _ Value

    X t  X t 1
    Percent _ Change  %   100
    X t 1
    Calculate the Growth Rate in Real
    GDP between 2006 and 2007
    %Change = [(RGDP2007 – RGDP2006)/RGDP2006] x
    100

    %Change = [(6,700 – 6,150)/6,150] x 100

    %Change = 8.94%

    That is real GDP grew by 8.94% between 2006 and


    2007.
    Calculate the Growth Rate in Real
    GDP between 2007 and 2008
    %Change = [(RGDP2008 – RGDP2007)/RGDP2007] x
    100

    %Change = [(7,190 – 6,700)/6,700] x 100

    %Change = 7.31%

    That is real GDP grew by 7.31% between 2007 and


    2008.
    The Price Level

    We can use our calculations of Nominal GDP and Real GDP to


    calculate the Price Level (A measure of the average prices
    of goods and services in the economy.)
    The GDP Deflator

    One example of a measure of the average price level is the


    GDP deflator.

    NGDPt
    GDP _ Deflatort   100
    RGDPt
    Calculate the GDP Deflator for
    2006
    GDP Deflator2006 = (NGDP2006/RGDP2006) x 100

    GDP Deflator2006 = (6,150/6,150) x 100 = 100

    Note: The GDP Deflator is always equal to 100


    in the base-year.

    The Price Index is “unitless”


    Calculate the GDP Deflator for
    2007 and 2008
    GDP Deflator2007 = (NGDP2007/RGDP2007) x 100

    GDP Deflator2007 = (7,450/6,700) x 100 = 111.19

    GDP Deflator2008 = (NGDP2008/RGDP2008) x 100

    GDP Deflator2008 = (8,395/7,190) x 100 = 116.76


    The Inflation Rate

    We can use the growth rate formula from previous to calculate


    the Inflation Rate (the Inflation Rate is The percentage
    increase in the price level from one year to the next.)
    Calculate the Inflation Rate from
    2006 to 2007
    Inflation Rate Between 2006 and 2007 =
    [(GDP Def.2007 – GDP Def.2006)/GDP Def.2006]
    x 100

    Inflation Rate Between 2006 and 2007 = [(111.19 –


    100)/100] x 100 = 11.19

    That is the inflation rate between 2006 and


    2007 was 11.19%.
    Calculate the Inflation Rate from
    2007 to 2008
    Inflation Rate Between 2007 and 2008 =
    [(GDP Def.2008 – GDP Def.2007)/GDP Def.2007]
    x 100

    Inflation Rate Between 2007 and 2008 = [(116.76 –


    111.19)/111.19] x 100 = 5.01

    That is the inflation rate between 2007 and


    2008 was 5.01%.

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