Gross domestic product is probably the most important of all macroeconomic indicators that allows you to judge the results of economic activity in the country for a specific period of time. It represents the total volume of manufactured products and services provided, received by residents of a particular state. In order to bring this indicator into a comparable form, economists calculate the GDP deflator, which makes it possible to trace the dynamics over several reporting periods in a constantly changing price level and structure. This indicator is a generalized measure of current inflation, therefore it always attracts the attention of many experts.
Definition
GDP deflator is a special price index created to determine the aggregate level of prices for services and goods (consumer basket) for a specific, single period. It allows you to calculate changes in real volumes produced in the countryproducts. Usually, it is calculated in the departments of official statistics; in Russia, the Federal State Statistics Service is in charge of this issue.
Basic Features
When calculating the GDP deflator, absolutely all goods and services that are included in the GDP of a given country are taken into account. Imported goods are excluded when determining this indicator. Unlike the consumer price index, this index (GDP deflator) is based on the current year's consumer basket, while the CPI uses a base period. If any new product was produced during the calculation period, then it also falls into the composition of this indicator.
Calculation and relationship of formulas
GDP deflator is the ratio of nominal GDP (Nominal GDP), expressed in market prices of the current period (usually take one year), to real GDP (Real GDP), which is determined in base year prices. As a rule, the result obtained is multiplied by 100, that is, converted to a percentage. Thus, its formula can be represented as follows:
GDP deflator=(Nominal GDP value / Real GDP value) x 100%.
Nominal GDP is calculated in several ways: by expenditure (production method), by income (distributive method) and by value added. Most often, the first option is used, which involves the use of the following formula:
GDP=RH + HFI + G + NE, where
РН – household expenditures;
HFI - gross privateinvestment;
G - public procurement;
NE is a country's net exports (the difference between exports and imports).
In addition, the price index of the reporting year (period) is calculated, which is needed in order to calculate real GDP:
Current Period Price Index=Current Period Prices / Base Period Prices.
By dividing by it the value of the nominal domestic product, we get the value of the volume of national production in comparable prices. As you can see, this price index is, in fact, the GDP deflator. Therefore, very often the following formula is used to find it:
GDP deflator=∑ (Qt x Pt) / ∑(Qtx P0), where
Qt – the volume of production of the reporting period in kind;
Pt – price of a good (service) in the reporting year;
P0 – price of a good (service) in the base year.
The resulting index has another name - the Paasche price index. If the resulting value is greater than one, this means that inflation in the economy is growing, and if it is less, it is falling.
