For instance, in the Indian economy, the price change of oil products is not reflected much in the GDP deflator since domestic oil production is low in India. compared to 3.5%) but it's especially important if you try to calculate inflation over multiple time periods. The nominal GDP is measured at the current prices whereas the real GDP is measured at the base year prices. If you compare these numbers to the numbers we calculated above, you can already see that real GDP doesn’t grow quite as much as nominal GDP. That means, from 2015 to 2016, the price level has increased by 60.9% (160.9 – 100). (adsbygoogle = window.adsbygoogle || []).push({}); In a second step, we can now calculate real GDP. This calculation reveals that prices of the goods produced in the year 2015 increased by 50 percent compared to the prices that the goods in the economy sold for in 2010. Your base year can be a year back, five years, 10, or even 100. Instructions. Though measures like CPI (Consumer Price Index) or WPI (Wholesale Price Index) are existing, the GDP deflator is a broader concept due to: The below graph shows the GDP Deflator of the Indian Economy: As can be seen the GDP deflator is steadily increasing from 2012 and is at 128.80 points for 2018. Share Details. Starting from there, we can now calculate real GDP for all three years. Updated Jul 13, 2020 (Published Nov 14, 2017), Three Requirements for Successful Investments, Opportunity Cost of Money vs. Stack Exchange network consists of 176 Q&A communities including Stack Overflow, the largest, most trusted online community for developers to learn, share … The GDP deflator is a measure of the change in the annual domestic production due to change in price rates in the economy and hence it is a measure of the change in nominal GDP and real GDP during a particular year calculated by dividing the Nominal GDP with the real GDP and multiplying the resultant with 100. It includes prices of investment goods, government services, and exports while excluding prices of imports. TIP: If you have chosen a base year of 1995, for example, the real GDP will be the current gross domestic product of your region, multiplied by their 1995 prices. This formula shows changes in nominal GDP that cannot be attributed to changes in real GDP. It is sometimes also referred to as the GDP Price Deflator or the Implicit Price Deflator. How to Calculate GDP using the Expenditure Approach, « Nominal Interest Rates vs. Real Interest Rates, Differences between the GDP Deflator and CPI », The Difference Between Saving and Investment, Factors that Cause a Shift in the Labor Supply Curve. The GDP deflator of the base year is 100. The GDP deflator, also called implicit price deflator, is a measure of inflation. But you need to choose a year against which to compare the inflation. This means that we choose a “base year” for prices and calculate GDP using those prices instead of the prices corresponding to the same year (the base can be any year we choose, as long as it’s consistent). Now that we know both nominal and real GDP, we can compute the actual GDP deflator. This indicates that the aggregate price levels are smaller in 2013 and 2014 indicating the impact of inflation on GDP, measuring the price of inflation/deflation compared to the base year. WPI, for instance, does not consider the service sector. Specifically, the GDP deflator measures the current price level of domestically produced goods relative to the price level in a specific base year. Step 5: Divide nominal GDP by real GDP, multiply by 100 Divide the nominal GDP by the real GDP. In 2015 real GDP amounts to USD 400,000 (100,000*2 + 200,000*1). 2010: 7,000 / 7,000 = 100.0 2. 1960 - 2019. Cheese = ($5 * 50) + ($6 * 40) + ($7 * 50) = $840 4. You may learn more about economics from the following articles –, Copyright © 2021. Compare nominal and real GDP and calculate and interpret the GDP deflator WDI Tables. When we calculate real GDP, for example, we take the quantities of goods and services produced in each year (for example, 1960 or 1973) and multiply them by their prices in the base year (in this case, 2005), so we get a measure of GDP that uses prices that do not change from year to year. Let us look at some of the critical differences between GDP Deflator vs CPI, This has been a guide to what is GDP Deflator. The GDP deflator can be viewed as a conversion factor that transforms real GDP into nominal GDP. To determine the Real GDP, you need to choose a base year and then use the pricing of different products and services in that year to determine the total sum of consumer expenditures on durable and non-durable goods and services, sum of expenditures on investments, sum of all government spending on goods and services and the difference between imports and exports for the year that you are … Real GDP adjusts nominal GDP so that it reflects the price levels that prevailed in a reference year, called the "base year." GDP deflator: linked series (base year varies by country) Inflation, GDP deflator (annual %) Inflation, GDP deflator: linked series (annual %) GDP per capita growth (annual %) Oil rents (% of GDP) Coal rents (% of GDP) GDP (current US$) Gross value added at basic prices (GVA) (current US$) Download . iv. In the year 2018, the economy produces 200 loaves of bread that sell for $3 each. If we calculate nominal GDP as described above, we find that for the year 2015, it amounts to USD 400,000 (100,000*2 + 200,000*1). Therefore, it is commonly used by economists and policymakers as a measure of inflation, together with the Consumer Price Index (see also GDP deflator vs. CPI). (Because 2010 is the base year, the value for the implicit price deflator for the year 2010 is 1.0 because nominal and real GDP are the same for the base year.) A deflator above 100 is an indication of price levels being higher as compared to the base year (2012 in this case). The real GDP is the gross domestic product of your country, measured in dollars from your base year. Suppose that the economy’s GDP is $2 million and since the base year, the prices of the economy have increased by 1.5%. Vegetables = ($10 * 200) + ($11 * 220) + ($13 * 230) = $7410 2. The GDP deflator is a measure of the price level of all domestically produced final goods and services in an economy. However, things become more interesting when we look at the following years. If there has been inflation, GDP deflator would be more than the base year prices and if there is deflation, then it would be less. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. It compares the price of existing produced goods and services against the price of the same goods and services in the base year. This gives us the change in nominal GDP (from the base year) that cannot be attributed to changes in real GDP. The table below shows the quantity produced and prices of both goods for three consecutive years (2015, 2016, and 2017). Similarly, we have calculated the GDP Deflator for the year 2011 to 2015. This figure is always called the “growth” rate and uses a single formula, regardless of whether the GDP is increasing or decreasing. What is GDP Deflator? As per World Bank Reports for 2017, India ranks 107 for the list of GDP Deflator with an inflation rate of 3%. Thus, to calculate the GDP deflator, we can follow a three-step process: (1) calculate nominal GDP, (2) calculate real GDP, and (3) calculate the GDP deflator. (Use 2017 as the base year.) And one way to interprate this is if the base year is 2010, that means that prices in 2010 could be viewed as being at 100 and that now, we're in 2011, we're in 102.5. Note that in the base year, real GDP is by definition equal to nominal GDP so that the GDP deflator in the base year is always equal to 100. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.Return to top, IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials, * Please provide your correct email id. Milk = ($12 * 20) + ($13 * 22) + ($15 * 26) = $916 5. Note. Solution Therefore, calculation of real GDP can be done using the above formula as, = $2,000,000/ (1+1.5%) =$2,000,000 /(1.015) Real gross domestic product will be – Real gross domestic product = 1,970,443.35 Hence, the real gross domestic produ… Label. Reading 14 LOS 14c . A ratio of the two gives the GDP deflator. Thus, to calculate the GDP deflator, we can follow a three-step process: (1) calculate nominal GDP, (2) calculate real GDP, and (3) calculate the GDP deflator. The GDP deflator of the base year is equal to 100. It reflects changes in the average price level within the economy. The GDP deflator of the base year is 100. Where, Nominal GDP = GDP evaluated using that current market prices; Real GDP = Inflation adjusted measure of all goods and services produced by an economy in a year; How to Calculate GDP Deflator? To produce a real terms series, divide each value in the series by the given deflator for that year, and then multiply by the deflator for the year that you wish to be the reference year. 2014: 11,111 / 10,852 = 102.4 6. (Use 2017 as the base year.) Imported goods are also included in the same. The GDP deflator can also be used to calculate the inflation levels with the below formula: Extending the above example, we have calculated the inflation for 2011 and 2012. Calculating the rate of inflation or deflation. 2013: 10,120 / 9,412 = 107.5 5. Check out the formula below: Going back to our example, we can quickly see that the GDP deflator for 2015 is 100 ([400,000/400,000]*100). It can be calculated as the ratio of nominal GDP to real GDP times 100 ([nominal GDP/real GDP]*100). It assigns changing weights over time as a composition of GDP changes. 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