Econ: What is Implicit GNP Price Deflator?

What is Implicit GNP Price Deflator? The Gross National Product (GNP) encompasses both the GDP, which is domestic, as well as international goods and services produced by a country. The GNP Price deflator is a measurement of GNP while factoring inflation into the equation in comparison to a designated baseline period of reference.

FinanceEcon
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Transcript

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

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in mind here The GDP price deflator is a measure

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of prices for goods and services produced within a country

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

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track inflation in that country Snow Haven is a tiny

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country located to the north of Greenland The nation boasts

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one hundred twenty residents total each of whom makes a

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

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a Nikon Ph D student working on a thesis Your

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roommate threw a party the day before you were scheduled

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

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somehow you ended up with a thesis topic centered on

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the economy of snow haven Will you start your research

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first step Calculate how big snow havens economy is Alright

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

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domestic product A broad measure of economic production right You

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know what that is You calculate that figure by adding

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up the value of all the goods and services produced

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by an economy during a period of time Well in

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

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dealing only with the value of all the ice sculptures

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they make In a more complex economy Like while the

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

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right So all the value of ski news and juicers

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and Oreos that get made in a year as well

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is the value of all the yoga classes and foot

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massages they get done Yet all gets added up will

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notice that the word value keeps coming up here You

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

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of services rendered You count the value of those goods

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and services like the dollar value of them If you

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just counted the number of goods like the volume well

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then making a bar of soap might count the same

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as making a passenger jet right one for one it

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

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another but obviously more goes into making the jet and

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a bunch More people have to work a lot more

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to get that jet made so it should count a

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lot more to GDP right has more value than a

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bar So so to give everything the proper waiting in

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the GDP figure the currency value of the stuff gets

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all out of together The soap contributes Ah fifty cents

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of GDP and the jet contributes an thirty eight million

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

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GDP gets impacted by price changes meaning inflation gets counted

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as growth prices rise GDP rise is whether or not

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actual output goes up We have to adjust for that

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So this year the people of Snow Haven made twenty

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thousand ice sculptures which sold for an average price of

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

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times twenty thousand or twenty million dollars GDP for the

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year for Snow Haven Yep twenty meg and next year

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

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of high class art Gallas in Monaco that you know

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needs ice sculptures so that drives the prices higher Average

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price rises to a thousand one hundred dollars each while

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we plug that into the GDP equation and that totals

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

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GDP growth Massive But all that growth was just from

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inflation And yes it could be pricing power of the

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

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

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

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by inflation that you know prices went up on that

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was kind of it So ideal is an economist You

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want to be able to tell how much changing prices

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contribute to the GDP growth That way you can get

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

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without inflation mucking up the whole situation So for that

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

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I even number We just figured out the name of

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

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

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

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

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GDP price deflator comes in Then it represents the ratio

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between nominal GDP and riel GDP It shows the impact

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that inflation had on GDP that year so Snow Haven

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has nominal GDP of twenty two million bucks for the

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year But two million of that came from price changes

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

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over real GDP twenty two million over twenty million The

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implicit GDP price deflator for the year then yes one

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point one a number above one on the deflator figure

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

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divide by that number and bring him down to the

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real number In other words there was inflation the higher

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the number while the higher the rate of inflation Yeah

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a number below one means that real GDP was higher

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than nominal GDP indicating a drop in general prices like

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

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also developed a painful infectious skin disease and starts to

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