GDP deflator

In economics, the GDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. GDP stands for gross domestic product, the total value of all final goods and services produced within that economy during a specified period.

Calculation

Measurement in national accounts

In most systems of national accounts the GDP deflator measures the ratio of nominal (or current-price) GDP to the real (or chain volume) measure of GDP. The formula used to calculate the deflator is:

$\operatorname {GDP\ deflator} ={\frac {\operatorname {Nominal\ GDP} }{\operatorname {Real\ GDP} }}\times 100$

Dividing the nominal GDP by the GDP deflator and multiplying it by 100 would then give the figure for real GDP, hence deflating the nominal GDP into a real measure.

It is often useful to consider implicit price deflators for certain subcategories of GDP, such as computer hardware. In this case, it is useful to think of the price deflator as the ratio of the current-year price of a good to its price in some base year. The price in the base year is normalized to 100. For example, for computer hardware, we could define a "unit" to be a computer with a specific level of processing power, memory, hard drive space and so on. A price deflator of 200 means that the current-year price of this computing power is twice its base-year price - price inflation. A price deflator of 50 means that the current-year price is half the base year price - price deflation. This can lead to a situation where official statistics reflect a drop in prices, even though they have stayed the same. Consider the example of the computer. From year to year, assume that the price of a new computer stays the same, but the computing power doubles. This would result in a price deflator of 50, though the consumer would have to spend the same amount of money on both systems.

Unlike some price indexes (like the CPI), the GDP deflator is not based on a fixed basket of goods and services. The basket is allowed to change with people's consumption and investment patterns. (Specifically, for GDP, the "basket" in each year is the set of all goods that were produced domestically, weighted by the market value of the total consumption of each good.) Therefore, new expenditure patterns are allowed to show up in the deflator as people respond to changing prices. The theory behind this approach is that the GDP deflator reflects up to date expenditure patterns. For instance, if the price of chicken increases relative to the price of beef, it is claimed that people will likely spend more money on beef as a substitute for chicken.

In practice, the difference between the deflator and a price index like the Consumer price index (CPI) is often relatively small. On the other hand, with governments in developed countries increasingly utilizing price indexes for everything from fiscal and monetary planning to payments to social program recipients, the even small differences between inflation measures can shift budget revenues and expenses by millions or billions of dollars.

United States

The GDP and GDP deflator are calculated by the US Bureau of Economic Analysis

United Kingdom

The GDP and GDP deflator series are published by the Office for National Statistics.

Canada

The GDP and GDP deflator series are published by the Statistics Canada.

Australia

The GDP and GDP deflator are calculated by the Australian Bureau of Statistics.

See also

• Fisher index
• Etienne Laspeyres
• Hermann Paasche
• Chained volume series (of GDP data.)
• Implicit Price Deflator for Personal Consumption Expenditures (IPD for PCE)
• Hedonic Index
• Inflation
• GDP

External links

• Gross Domestic Product (GDP) deflators: a user's guide
• Historical U.S. GDP deflator figures from the federal budget (table 10.1)

Data

• OECD GDP deflator data
• IMF database of country GDP deflators for 1980-2013
• Briefing.com: GDP-Adv.
  • Compare with Briefing.com: CPI