Reviewed by Vishnava Updated on Nov 11, GDP deflator or an implicit price deflator is an indicator of the impact of inflation on GDP in an economy, or it merely notes the price changes in an economy in one year. GDP deflator gets its name from the process of calculating the value of price change as reflected in real and nominal GDP of the country. GDP deflator is an essential measure in an economy that helps compare the rise in price levels of goods and services between years.
Unlike Consumer Price Index CPI , GDP deflator can be compared between several periods of time without the use of base year as its constant, nor use a specific basket of goods.
GDP Deflator is flexible. This is possible because the deflator is not based on a particular sect or basket of goods. Jonathan D. Church, "Comparing the Consumer Price Index with the gross domestic product price index and gross domestic product implicit price deflator," Monthly Labor Review, U. Dalton, John S. Greenlees, and Kenneth J. National Income and Product Accounts U. Bureau of Economic Analysis, December , chapters 1—4, p. National Income and Product Accounts , chapters 1—4, p. Bureau of Economic Analysis, December , pp.
See also Concepts and methods of the U. National Income and Product Accounts , chapters 1—4, pp. In the Laspeyres index calculation, price relatives are weighted by quantity in a base period i.
In the Paasche index calculation, price relatives are weighted by quantity in the current period. In the case of price indexes, the Fisher ideal index allows for the measurement of real-time changes in quantity.
McCully, Brian C. Moyer, and Kenneth J. Bureau of Economic Analysis and U. Bureau of Labor Statistics, September , p. See also Clinton P. Bureau of Economic Analysis, June , pp.
Personal Finance. Your Practice. Popular Courses. Part Of. Understanding Inflation. Types of Inflation. What Does Inflation Impact? Understanding Hyperinflation. Understanding CPI. Related Terms A-I. Related Terms J-Z. Economics Macroeconomics. Key Takeaways The GDP price deflator measures the changes in prices for all of the goods and services produced in an economy.
Using the GDP price deflator helps economists compare the levels of real economic activity from one year to another. The GDP price deflator is a more comprehensive inflation measure than the CPI index because it isn't based on a fixed basket of goods. Compare Accounts.
The offers that appear in this table are from partnerships from which Investopedia receives compensation. And now we can manipulate this thing using any type of algebra that we want. This is where I kind of specified exactly what we're talking about. This is a nominal GDP of year two. And remember, this is nominal GDP in year two. This is real GDP in year two, measured in year one dollars. Or we can divide both sides of this equation by this over This is nominal GDP in year two.
And writing it this way kind of feels like you're taking your nominal GDP in year two, and there's been a general increase in the level of prices. That's called price inflation. We see that right over here. And now we're deflating it to get real GDP. We're dividing it by the ratio of the prices. We're dividing it essentially by how much the prices have grown, or I guess you could say the ratio between the year two prices and the year one prices.
So this quantity right over here is 1. We're getting it in, remember, this is in year one prices. And because of that, this number right over here is referred to as a deflator. This is our GDP deflator. You pick a base here, in this case, it was year one. That base year could have been
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