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Chapter 19: Problem 2

What is the GDP deflator, and how is it calculated?

Short Answer

Expert verified
The GDP deflator, a measure of price inflation/deflation with regards to GDP, is calculated by the formula \( GDP \, Deflator = (\frac{Nominal \, GDP}{Real \, GDP}) \times 100 \).

Step by step solution

01

Definition of GDP Deflator

The GDP deflator, also known as GDP price deflator, is a measure of the level of prices of all new, domestically produced, final goods and services in an economy in a year. GDP stands for Gross Domestic Product. The GDP deflator is a measure of price inflation/deflation with regards to the Gross Domestic Product, and gives a broader measure of inflation within an economy. It is an economic metric that converts output measured at current prices into constant-dollar GDP.
02

Understanding the Need for GDP Deflator

The GDP deflator is a measure that allows us to differentiate between increases in GDP due to increased production or due to increased prices. It gives an understanding of the impact of inflation on the economy. It is an important tool used by economists to understand the health of an economy.
03

Calculation of GDP Deflator

The GDP deflator is calculated by dividing the Nominal GDP by the Real GDP and then multiplying by 100. It is represented as a percentage. Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation. Real GDP is Nominal GDP, adjusted for inflation to reflect changes in real output. The formula for GDP deflator is: \( GDP \, Deflator = (\frac{Nominal \, GDP}{Real \, GDP}) \times 100\)

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Most popular questions from this chapter

An article in the Wall Street Journal stated that "GDP figures are a measure of all the goods and services that are produced in an economy during a particular period." Briefly explain whether you agree with this definition of GDP.

Briefly discuss the accuracy of the following statement: "Corporate profits are much too high: Most corporations make profits equal to 50 percent of the price of the products they sell."

Briefly explain whether you agree with the following statement: "In years when people buy many shares of stock, investment will be high and, therefore, so will GDP."

What is the difference between GDP and GNP? Briefly explain whether the difference is important for the United States.

What are the differences between national income, personal income, and disposable personal income?
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