Finance
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# What is a GDP Deflator?

Malcolm Tatum
Malcolm Tatum

The GDP deflator is utilized as a measure of shifts in the prices of goods and services that are produced in a given country. It is understood that the GDP deflator can help provide a more accurate picture of the current status of the gross domestic product within the country. Because the GDP deflator is understood to be an example of an implicit price deflator for GDP, economists consider calculating this economic indicator as an essential component in ascertaining the current strength or weakness of the country’s economy.

The formula for calculating the GDP deflator is relatively simple. Essentially, the calculation requires current information regarding the chain volume measure or real GDP, and the current price or nominal GDP. This figure is calculated by taking the nominal GDP, dividing it by a known deflator, and multiplying the result by one hundred. This final figure will represent the real current status of the gross domestic product, as it allows for the change or deflation of the nominal GDP into real world terms.

One of the easiest ways to think of the GDP deflator is to think of it as current dollars and conditions compared to the same set of factors in a previous time period. For example, an idea of the GDP deflator associated with the most recent calendar year can be ascertained by looking at the state of the GDP in a previous calendar year. This can be helpful in determining if an inflation of the GDP is taking place from one period to another.

It is possible to use this approach both with the broad GDP for an entire country, or to understand the economic stability of some sub-category within the economy of the country. Businesses will often use this approach to gauge conditions within their own industry. Using the current year price and the number of units produced, as compared to the price and production of a previous year can help to indicate whether there is actually growth or shrinkage taking place.

The formula for the GDP deflator may indicate that the relationship between units and unit price is shifting in some manner, such as more generated revenue but less units produced. This would indicate the presence of upward price changes or price inflation. At the same time, less revenue generated from more produced units indicates downward changes in prices that may eventually drive some manufacturers out of the industry.

Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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@CoffeeJim, while I appreciate your skeptical analysis of the failure our economic measures have had on determining the crashes in a market, may I remind you that true market knowledge is something that is both impossible and impracticable to predict.

Others would argue that they did in fact predict that sub-prime mortgage crisis that has now left tens of thousands of families without a roof over their heads, or at least a roof they can call their own.

Anytime a bank gets greedy, and yes it is very possible for a bank to do so, there are risks that it is willing to take in order to justify a higher rate of income. When that risk isn't analyzed properly then we run into trouble.

So my point is that economic tools like the GDP deflator are critical to getting at least some kind of insight on what is happening in our vastly complicated and engorged market system. Of course our great system of capitalism is far from perfect but we refine it everyday and this crash will be remembered as a major stepping stone toward just and more available economic freedom.

CoffeeJim

@NightChef, you claim that these tools and research make it possible for use to see the lifelines of our economy yet we still have giant meltdowns that cause global economic chaos.

Why is it that we didn't see the giant housing collapse in 2008 and 2009? Surely such magnificent analysis should have revealed that hundreds of banks were giving people that desired a home a mortgage they could never afford.

Sure, why should the people take a loan that they can pay for but in the end, the bank did allow for that loan to be taken.

Economic responsibility is what we need and if a GDP deflator is needed to help measure our system then I am all for it but I don't by all the nonsense that comes out of economic jargon.

NightChef

@thumbtack, you untrustworthy attitude and mean demeanor toward the economic system is evident in your response to this article. Unfortunately your claims of the inability for economists to summarize or report on the well-beings of an economic body are simply false.

It is precisely tools like the GDP Deflator that allow for such predictions, analysis and research to be completed on such complicated manners.

While the raw data or even the detailed analysis that comes out of such tools as the GDP deflator may not be understandable by many, it is then the job of economists and actuaries to put the numbers into coherent language that can be applied to the policies that they affect.

Just because one doesn't understand that basis for economic analysis doesn't mean we should toss it aside as nonsense. These tools and data sets are what allow us to track market trends, fixations and proper loan handling in the trade.

thumbtack

Like most specific economy terms, the GDP Deflator is another way of distorting the truth and accurate means of measuring the full size of the economy. When I saw another way of distorting, I mean most ways of describing the numerical values of how a nations economy is measured are either inaccurate, disruptive or downright false.

I don't think that economists are to blame for these very unintelligible and archaic or sometimes too modern definitions and tools. As a scientist of numbers after all, it is their duty to supply the most accurate and properly adjusted information on financial terms. Unfortunately, and I think most economists would agree with me that our world's financial systems are far too vast and complicated to ever be symbolized by a simple percentage or report.

This burden of information coming from tools like the GDP Deflator should make the average citizen more skeptical about the analysis of such intelligence.