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.

  • Macroeconomic Factors Influencing the Interest Rate

    • Taylor explained the rule of determining interest rates using three variables: inflation rate, GDP growth, and the real interest rate.
    • According to Taylor's original version of the rule, the nominal interest rate should respond to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP:
    • In this equation, it is the target short-term nominal interest rate (e.g., the federal fund rates in the United States), πt is the rate of inflation as measured by the GDP deflator, π*t is the desired rate of inflation, r*t is the assumed equilibrium real interest rate, yt is the logarithm of real GDP, and y*t is the logarithm of potential output, as determined by a linear trend.
    • The GDP gap or the output gap is (yt - y*t).
    • Taylor explained the rule in simple terms using three variables: inflation rate, GDP growth, and the equilibrium real interest rate.

  • 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.

  • Growth Economics

    • By itself, GDP doesn't necessarily tell us much about the state of the economy, but change in GDP does.
    • It is conventionally measured as the percent rate of increase in real GDP.
    • Inflation and Deflation can make it difficult to measure economic growth
    • Inflation or deflation can make it difficult to measure economic growth.
    • To express real growth rather than changes in prices for the same goods, statistics on economic growth are often adjusted for inflation or deflation.

  • Measuring the Economic Environment

    • It is conventionally measured as a percentage change in the Gross Domestic Product (GDP) or Gross National Product (GNP).
    • Inflation or deflation can make it difficult to measure economic growth.
    • If GDP, for example, goes up in a country by 1% in a year, was this due solely to rising prices (inflation) or because more goods and services were produced and saved?
    • To express real growth rather than changes in prices for the same goods, statistics on economic growth are often adjusted for inflation or deflation.
    • For example, a table may show changes in GDP in the period 1990 to 2000, as expressed in 1990 U.S. dollars.

  • 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.

  • Deflation

    • Deflation is a decrease in the general price level of goods and services and occurs when the inflation rate falls below 0%.
    • In economics, deflation is a decrease in the general price level of goods and services.
    • Economists generally believe that deflation is a problem in a modern economy because they believe it may lead to a deflationary spiral .
    • But any of these may occur separately without deflation.
    • Annual inflation (in blue) and deflation (in green) rates in the United States from 1666 to 2004