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- It seems to me that the formula at the end of the article is inaccurate and potentially misleading. Shouldn't the numerator be the current-price value of the base year total production? With the deflator formula as it is, GDP growth can only be 0%.
- "Current year GDP/base year GDP" looks like the "nominal" GDP increase from the base year to the current year. - Jerryseinfeld 22:20, 17 Dec 2004 (UTC)
- The formula should be as follows: GDP Deflator = (Nominal GDP / Real GDP)x100.
I don't like the name "deflator", it's a price index like everybody else.--Jerryseinfeld 17:35, 1 Jan 2005 (UTC)
I disagree. Firstly, deflator is the technical term used in a variety of literature on the subject, and is the language that technical economists use. As such it is what we should reflect here. Secondly, a deflator is not a price index, and shouldn't be used as such. The Australian national accounts, for instance, publish both a deflator and a chain price index, which behave differently. EcoRat 03:55, 18 August 2005 (UTC)
"The GDP deflator is not based on a fixed market basket of goods and services." -- This sentence is confusing. Should it read "The GDP deflator is based on a market basket of goods and services which is not fixed." --22.214.171.124 18:11, 19 August 2005 (UTC)
Hmmm. I take the point, although I'm not sure that the suggested wording works either. I'll edit it to make more sense. EcoRat 07:37, 21 August 2005 (UTC)
Deflator and price index are the same thing. There are several different methods to compute a price index or deflator, however (Paasche, Laspeyres, Fisher and so on). The statistical office of Germany calls chain indices also deflators. Alex1011 08:27, 1 March 2006 (UTC)
"...the government estimated that real tech spending rose from $446 billion to $557 billion, when nominal spending only increased to $488 billion. That extra $72 billion represents the value the government imagines the improvement in computer quality is worth."
This passage is a little confusing. I could not derive the figure 72. I would appreciate if someone could look though this. Thanks!
You are right. (557-446)-(488-446)=69. The original writer needs to fix it, because there's no telling which number is wrong, though I assume it is the 72. There might be some correction for inflation, and all of the numbers are right, but the correction for inflation was neglected. Something should be fixed there.
Corrections and POV
I removed several inaccurate and POV statements. The following statement demonstrates the basic problem
The advantage of this approach is that the GDP deflator accounts for changes in both prices and the composition of the basket - i.e. as prices and consumer preferences change, the GDP deflator accurately tracks both automatically
The GDP does not measure prices and changes in the basket automatically. GDP measurements are combined with price index measurements to produce the GDP deflator. As the article formula shows, the GDP deflator is calculated by dividing nominal GDP by real GDP. In order to calculate real GDP, there needs to be an existing measurement of price change. The GDP deflator does not measure price change "automatically."
However, this also makes the GDP deflator less than desirable from a political and policy standpoint, as it cannot be manipulated in any way to reflect subjective preferences regarding what goods are 'most important' to measure when figuring an inflation rate. The U.S. government's Consumer Price Index (CPI) can be viewed, from the government's standpoint, as more desirable in this regard, even if it is probably less accurate.
The above is POV speculation and inaccurate. The US GDP deflators (e.g. PCE price index) actually use some CPI data. As stated above, there needs to be some existing price measurement to calculate a GDP deflator)
It can also be argued that abandoning use of the hedonic price index in this way, and simply relying on the GDP deflator, would also accurately reflect this increase in value and utility, though with less complication. The GDP itself would tend to increase over the same period (via greater productivity), at some level reflecting the greater capability better computers brought to the economy, and the deflator would simply record the real price increase of computers themselves.
This is the most accurate thing I'm removing. While GDP would eventually pick up some of the benefits of increased productivity from better computers, it would still miss out on the direct benefits of consumers. It would be like saying "lets not measure cars in GDP because the benefits of transportation will be picked up in the rest of GDP."--Bkwillwm 03:35, 22 August 2007 (UTC)
I don’t agree that the basket is fixed. In the case of the GDP deflator, the “basket” is the entire economy (i.e., GDP). Within that “basket,” the share of consumption vs. exports may shift, and if it does, the deflator will reflect that period by period. I also don’t think the article has any POV issues at all.DOR (HK) (talk) 09:45, 19 November 2008 (UTC)
Relationship to inflation
The YoY change in GDP deflator can be shown to be approximated to inflation. This is because of Laspeyres or Paasche price index formula used to define inflation or price index.
The index methods above use both price and qty in the ratios to define indices.
The relationship stems from the base method being Laspeyres or Paasche.
%deflator = 1+ %inflation from base year
is true because inflation is the summation weighted average of price times quantity , or the summation of weighted average of the net amount spent on an item.
If you buy 3 soap bars instead of 2, while it will still represent an "w1" weighted percentage of household expense in the inflation component, the price times qty will contribute to an increase in inflation.
It is always the net amount spent on an item as a % of total consumption of the basket (the weights measure that %age of total expense spent), that is considered for inflation.
This is why the change in GDP deflator becomes a measure of inflation.