GDP Price Deflator

  

Categories: Econ

As an economist for a country, you are tasked with finding out the GDP deflator for last year: 2017. You need to look back at 2017 nominal GDP and real GDP to figure out what the deflator would be. This will help you determine how well or how badly the economy might be doing based on prices. You'll need to use an equation to figure out what the correct numbers are.

Let’s say the nominal GDP for this year was 740,000 and the real GDP was 460,000. You will divide those numbers, then multiply by 100: ({740,000/460,000}*100). Which will give you a deflator of 160.90. This means the price level has increased by 60.9% from the base year. GDP Deflator helps you determine how much inflation is occurring throughout the years when compared to a base year.

Related or Semi-related Video

Econ: What is Implicit GNP Price Deflato...0 Views

00:00

And finance Allah shmoop What is implicit GDP price deflator

00:08

Okay people there are price deflator is like you know

00:12

things that would bring down something's price Think two day

00:15

old sushi or Christmas ornaments on sale December twenty sixth

00:20

for a prize show dog that suddenly loses all its

00:24

air Well that's not kind of price deflator we have

00:26

in mind here The GDP price deflator is a measure

00:29

of prices for goods and services produced within a country

00:33

for a period of time It's a way to basically

00:35

track inflation in that country Snow Haven is a tiny

00:42

country located to the north of Greenland The nation boasts

00:45

one hundred twenty residents total each of whom makes a

00:48

living from the production and export of ice sculptures You're

00:51

a Nikon Ph D student working on a thesis Your

00:54

roommate threw a party the day before you were scheduled

00:56

to declare your thesis topic You don't remember much but

00:59

somehow you ended up with a thesis topic centered on

01:01

the economy of snow haven Will you start your research

01:04

first step Calculate how big snow havens economy is Alright

01:08

that's pretty simple To measure economic output Used GDP gross

01:11

domestic product A broad measure of economic production right You

01:14

know what that is You calculate that figure by adding

01:17

up the value of all the goods and services produced

01:19

by an economy during a period of time Well in

01:21

snow havens case where everyone just makes ice sculptures you're

01:24

dealing only with the value of all the ice sculptures

01:27

they make In a more complex economy Like while the

01:29

U S You're dealing with a whole lot more things

01:32

right So all the value of ski news and juicers

01:34

and Oreos that get made in a year as well

01:36

is the value of all the yoga classes and foot

01:39

massages they get done Yet all gets added up will

01:42

notice that the word value keeps coming up here You

01:44

don't count the number of goods made or the number

01:47

of services rendered You count the value of those goods

01:51

and services like the dollar value of them If you

01:54

just counted the number of goods like the volume well

01:56

then making a bar of soap might count the same

01:59

as making a passenger jet right one for one it

02:02

doesn't quite work The soap is one thing The jets

02:04

another but obviously more goes into making the jet and

02:06

a bunch More people have to work a lot more

02:08

to get that jet made so it should count a

02:10

lot more to GDP right has more value than a

02:12

bar So so to give everything the proper waiting in

02:14

the GDP figure the currency value of the stuff gets

02:17

all out of together The soap contributes Ah fifty cents

02:21

of GDP and the jet contributes an thirty eight million

02:24

But there's an issue that comes up with this method

02:27

GDP gets impacted by price changes meaning inflation gets counted

02:31

as growth prices rise GDP rise is whether or not

02:35

actual output goes up We have to adjust for that

02:38

So this year the people of Snow Haven made twenty

02:40

thousand ice sculptures which sold for an average price of

02:42

a thousand bucks each The math Well that's a thousand

02:45

times twenty thousand or twenty million dollars GDP for the

02:48

year for Snow Haven Yep twenty meg and next year

02:51

they also make twenty thousand sculptures But there's a wave

02:54

of high class art Gallas in Monaco that you know

02:59

needs ice sculptures so that drives the prices higher Average

03:02

price rises to a thousand one hundred dollars each while

03:05

we plug that into the GDP equation and that totals

03:08

of GDP of twenty two million dollars That's ten percent

03:12

GDP growth Massive But all that growth was just from

03:15

inflation And yes it could be pricing power of the

03:18

supplier Ah got higher because they're ice sculptures were more

03:22

in demand and more highly prized But that's not where

03:25

this question's going We're going to say it's on ly

03:27

by inflation that you know prices went up on that

03:30

was kind of it So ideal is an economist You

03:32

want to be able to tell how much changing prices

03:35

contribute to the GDP growth That way you can get

03:38

an accurate picture of what's going on in the economy

03:40

without inflation mucking up the whole situation So for that

03:43

reason there are actually two GDP measures There's nominal GDP

03:47

I even number We just figured out the name of

03:50

the GDP the name of that number It's the raw

03:52

number that includes the price changes And then there's really

03:55

GDP It's an adjusted number where the impact of price

03:59

changes get well soon tricked out Here's where the implicit

04:01

GDP price deflator comes in Then it represents the ratio

04:05

between nominal GDP and riel GDP It shows the impact

04:09

that inflation had on GDP that year so Snow Haven

04:13

has nominal GDP of twenty two million bucks for the

04:15

year But two million of that came from price changes

04:18

so the country's riel GDP was twenty million nominal GDP

04:22

over real GDP twenty two million over twenty million The

04:25

implicit GDP price deflator for the year then yes one

04:29

point one a number above one on the deflator figure

04:32

means prices went up during the period We're going to

04:35

divide by that number and bring him down to the

04:37

real number In other words there was inflation the higher

04:39

the number while the higher the rate of inflation Yeah

04:42

a number below one means that real GDP was higher

04:45

than nominal GDP indicating a drop in general prices like

04:49

deflation Like when you're suddenly evolved Former prize show dog

04:53

also developed a painful infectious skin disease and starts to

04:58

show early signs of rabies Yeah run for the hills 00:05:01.37 --> [endTime] people Yeah

Up Next

Finance: What are Gross Domestic Product (GDP) and Gross National Product (GNP)?
8 Views

What are Gross Domestic Product (GDP) and Gross National Product (GNP)? The Gross Domestic Product is the sum total value of products and services...

Find other enlightening terms in Shmoop Finance Genius Bar(f)