What is the GDP deflator and how is it calculated

Gross Domestic Product is probably the most important of all macroeconomic indicators, allowing to judge the results of economic activity in the country for a specific period of time. It represents the aggregate volume of output and services provided by residents of a particular state. In order to bring this indicator to a comparable level, economists calculate the GDP deflator, which makes it possible to trace the dynamics over several reporting periods in the face of an ever-changing level and price structure. This indicator is a generalized measure of current inflation, therefore it always attracts the attention of many experts.

Definition

The GDP deflator is a special price index created to determine the aggregate level of prices for services and goods (the consumer basket) for a specific, single period. It allows calculating changes in the real volumes of products produced in the country. Usually his calculations are carried out in the departments of official statistics, in Russia this issue is managed by the Federal State Statistics Service.

Basic properties

When calculating the GDP deflator, take into account absolutely all goods and services that are included in the GDP of a given country. Imported goods in determining this figure exclude. Unlike the consumer price index, this index (the GDP deflator ) is based on the value of the consumer basket of the current year, whereas the CPI uses a base period. If any new products have been produced during the calculation period, it also falls within this indicator.

Calculation and relationship of formulas

The GDP deflator is the ratio of the nominal GDP (Nominal GDP), expressed in current year market prices (usually takes one year), to real GDP (real GDP), which is determined at the prices of the base year. As a rule, the result is multiplied by 100, i.e. translated as a percentage. Thus, its formula can be represented in the following form:

GDP deflator = (Nominal GDP value / Real GDP value) x 100%.

Nominal GDP is calculated using several methods: by expenditure (production method), by income (distribution method) and by value added. Most often use the first option, which involves the use of such a formula:

GDP = RH + RFI + G + CHE, where

RN - expenses of the population;

VCI - gross private investment;

D - state procurement;

CHE - net exports of the country (difference between export and import).

In addition, calculate the price index of the reporting year (period), which is needed in order to calculate the real GDP:

Current price index = Current period prices / Base period prices.

Dividing the value of the nominal domestic product by it, we will get the value expression of the volume of national output in comparable prices. As you can see, this price index, in fact, is the GDP deflator. Therefore, very often to find it, the following formula is used:

GDP deflator = Σ (Q ^t x P ^t ) / Σ (Q ^t x P ⁰ ), where

Q ^t - volume of production of the reporting period in physical terms;

P ^t - the price of the goods (service) in the reporting year;

P ⁰ - the price for the goods (service) in the base year.

The received index has one more name - the Paasche price index. If the value obtained is greater than one, it means that inflation in the economy is growing, and if less, it is falling.