What is GDP Deflator? A Simple Guide to Understand All about GDP Deflator
If you are preparing for the UPSC exam then the term GDP deflator is not new to you. You must be wondering what is a GDP deflator?
The GDP deflator is a measure of inflation and is also called implicit price deflator. It helps to record and measure all the price level changes of an economy in the output of goods and services of one year. Gross domestic product deflator shows the amount of change in GDP due to inflation and not increase in output.
It is expressed under a ratio form and the GDP deflator formula is 100 × NOMINAL GDP ÷ REAL GDP
Terms related to GDP deflator:
- Nominal Gross Domestic Product
- Real Gross Domestic Product
What does GDP Deflator Do?
Next, you may wonder what the GDP deflator does. As mentioned it measures the change in prices for all goods and services in an economy.
This further helps economists of the country to understand the level of inflation in the economy, compare levels of real economic activities and ways to curb inflation. It takes into account all the goods and services produced and thus is preferred over other measures of inflation.
Importance of GDP Deflator
The GDP deflator is among the measures of inflation. When compared to other measures like consumer product index (CPI) and wholesale price index (WPI) it is of a much broader sense. It calculates inflation on the whole economy and not just on a basket of select goods like CPI or WPI.
Any change in consumption pattern or structural reforms are directly considered into the GDP deflator. Though CPI and WPI are available on a monthly basis they do not give a clear picture of inflation in the economy.
Real GDP vs Nominal GDP
Now, it is important to understand the components of GDP deflator for your UPSC exam.
Real gross domestic product is an inflation-adjusted measure that gives us the value of the gross domestic product of an economy in a particular year. It is estimated as an index of the total quantity of output and in layman’s terms is the regular GDP we talk about. It is also called constant price GDP.
Nominal gross domestic product is the monetary value of all goods and services produced in an economy in a particular year at current prices. This causes it to keep changing every year as the prices of goods may increase due to inflation.
In case if inflation exists and is high, then the value of Nominal GDP will be higher as it is based on current year prices than the Real GDP
If Inflation does not exist or is low then the Real GDP value will be greater than nominal GDP value.
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