- What is the GDP deflator?
- What is the GDP deflator for?
- How the GDP deflator is calculated
- Advantages of the GDP deflator
- Disadvantages of the GDP deflator
What is the GDP deflator?
He GDP deflator It is an index used to measure the price variation experienced by the Gross Domestic Product (GDP).
This measurement is useful for knowing how the economy is evolving in a country or a given territory, and from there being able to make decisions in one direction or another.
The GDP deflator lets you know whether an economy is growing or whether prices are just growing. That’s why this concept is so popular in times when inflation is particularly high.
What is the GDP deflator for?
The GDP deflator is used to calculate the difference between nominal GDP and real GDP.
What is done is eliminate the effect of inflation in order to have a more concrete idea of the state of the economy of a place.
It is important to know the difference between nominal GDP and real GDP:
- Nominal GDP: They are the market prices that exist during a specific period, that is, including inflation.
- Real GDP: The prices of the previous year are used as a base, so the effect of price increases does not disturb the calculation.
This way, you can compare the economy from one year to another without falling into traps or errors.
The goal is to obtain an average of the prices of goods and services in a country over a year. This allows measures to be taken to combat inflation in one direction or another.
How the GDP deflator is calculated
To calculate the GDP deflator, nominal GDP must be divided by real GDP. Once you have done this, you must multiply the result by 100.
To obtain the complete result, the prices of all goods and services produced in a country over the course of a year must be included.
This is a more comprehensive variable than the CPI, but since it is difficult to calculate, the latter is often used to discuss inflation.
The main difference from the CPI is that the GDP deflator provides a real result and not a statistical one. It is most useful to combine both variables to have a complete perspective of the economic situation of a country or region.
Advantages of the GDP deflator
This variable is not used from a statistical point of view, so a large part of the population is not usually interested in it. But this does not mean that it is unnecessary.
These are the main advantages of the GDP deflator:
- It takes into account changes in consumer habits over a year.which provides a complete picture of a country’s situation and the purchasing power of its inhabitants.
- The calculation includes all the goods and services that have been produced in a country.
- The result may be useful for Central Banks or governments of each region to know what measures to take to control inflation.
Disadvantages of the GDP deflator
The GDP deflator not only offers advantages, it also has some drawbacks that should be known before using it.
The main criticism that can be made of this indicator is that it is laborious. It is difficult to calculate and takes more time. This means that the CPI statistic is used more in certain areas.
Besides, The GDP deflator does not take into account the shadow economy, so the image it ends up showing is not entirely accurate.