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What is the GDP deflator?

Source : What is the GDP deflator?

News:

  1. GDP deflator is a more comprehensive measure of inflation.

Important facts:

2. GDP deflator:

  • It is a more comprehensive measure of inflation.
  • The GDP deflator, also called implicit price deflator, is a measure of inflation.
  • It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year.
  • This ratio helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output.
  • The deflator is more comprehensive measure of inflation because it covers the entire range of goods and services produced in the economy.
  • The formula to find the GDP price deflator:
    • GDP price deflator = (nominal GDP ÷ real GDP) x 100
  • Changes in consumption patterns or introduction of goods and services are automatically reflected in the GDP deflator.
  • This allows the GDP deflator to absorb changes to an economy’s consumption or investment patterns.
  • Often, the trends of the GDP deflator will be similar to that of the CPI

3. Real GDP vs Nominal GDP

  • GDP price deflator measures the difference between real GDP and nominal GDP.
  • Nominal GDP differs from real GDP as the former doesn’t include inflation, while the latter does.
  • Nominal GDP will most often be higher than real GDP in an expanding economy.

4. WPI, CPI

  • A consumer price index (CPI) measures changes in the general level of prices of goods and services that households acquire for the purpose of consumption.
  • However, since CPI is based only on a basket of select goods and is calculated on prices included in it, it does not capture inflation across the economy as a whole.
  • The wholesale price index basket has no representation of the services sector and all the constituents are only goods whose prices are captured at the wholesale/producer level.
  • The GDP deflator reflects up-to-date expenditure patterns.
  • GDP deflator is available only on a quarterly basis along with GDP estimates, whereas CPI and WPI data are released every month.
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