How to Calculate the GDP Deflator - Quickonomics (2024)

Updated Jul 13, 2020

The GDP deflator is a measure of the price level of all domestically produced final goods and services in an economy. It is sometimes also referred to as the GDP Price Deflator or the Implicit Price Deflator. It reflects changes in the average price level within the economy. 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). Specifically, the GDP deflator measures the current price level of domestically produced goods relative to the price level in a specific base year. 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.

1. Calculate Nominal GDP

Nominal GDP is defined as the monetary value of all finished goods and services within an economy valued at current prices (see also GDP). So this part is pretty easy. All we have to do is multiply the quantity of all goods and services produced with their respective prices and add them all up (see also How to Calculate GDP using the Expenditure Approach).

To give an example, think of an economy that only produces ice cream and candy bars. The table below shows the quantity produced and prices of both goods for three consecutive years (2015, 2016, and 2017). 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). Meanwhile for 2016 nominal GDP is USD 740,000 (120,000*2.5 + 220,000*2) and for 2017 nominal GDP amounts to USD 1,290,000 (150’000*4 + 230,000*3).

How to Calculate the GDP Deflator - Quickonomics (1)

2. Calculate Real GDP

In a second step, we can now calculate real GDP. Unlike nominal GDP, real GDP shows the monetary value of all finished goods and services within an economy valued at constant prices. That means, we choose a base year and use the prices of that year to calculate the values of all goods and services for all the other years as well. This allows us to eliminate the effects of inflation.

In our example, we’ll pick 2015 as our base year. Thus, the reference prices of ice cream and candy bars are USD 2.00 and USD 1.00, respectively. Starting from there, we can now calculate real GDP for all three years. In 2015 real GDP amounts to USD 400,000 (100,000*2 + 200,000*1). Note that in the base year, real and nominal GDP are always the same because we use the same prices when calculating them. Meanwhile, for 2016 real GDP is USD 460’000 (120,000*2 + 220,000*1) and for 2017 it amounts to USD 530,000 (150,000*2 + 230,000*1). 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.

3. Calculate the GDP Deflator

Now that we know both nominal and real GDP, we can compute the actual GDP deflator. To do this, we divide nominal GDP by real GDP and multiply the result with 100. This gives us the change in nominal GDP (from the base year) that cannot be attributed to changes in real GDP. Check out the formula below:

How to Calculate the GDP Deflator - Quickonomics (2)

Going back to our example, we can quickly see that the GDP deflator for 2015 is 100 ([400,000/400,000]*100). The GDP deflator for the base year will always be 100 because nominal and real GDP have to be equal. However, things become more interesting when we look at the following years. For the year 2016, the GDP deflator is7 160.9 ([740,000/460,000]*100). That means, from 2015 to 2016, the price level has increased by 60.9% (160.9 – 100). Similarly, the GDP deflator for 2017 is 243.4, which reflects a price level increase of 143.4% compared to the base year.

In a Nutshell

The GDP deflator is a measure of the price level of all domestically produced final goods and services in an economy. It is sometimes also referred to as the GDP Price Deflator or the Implicit Price Deflator. It can be calculated as the ratio of nominal GDP to real GDP times 100 ([nominal GDP/real GDP]*100). This formula shows changes in nominal GDP that cannot be attributed to changes in real GDP. Hence, the GDP deflator is often used by economists to measure inflation, together with the Consumer Price Index (CPI).

How to Calculate the GDP Deflator - Quickonomics (2024)

FAQs

How do I calculate the GDP deflator? ›

To calculate the GDP price deflator, divide the nominal GDP by the real GDP and multiply the result by 100. Nominal GDP is the total value of goods and services produced during a specific period less the value of products made during production.

What is the formula for the implicit price deflator for GDP? ›

Implicit price deflator = nominal GDP / real GDP

Following the convention of multiplying price indexes by 100, the published number for the implicit price deflator was 119.8.

What is the GDP deflator macro? ›

The gross domestic product implicit price deflator, or GDP deflator, measures changes in the prices of goods and services produced in the United States, including those exported to other countries.

How to remember the GDP formula? ›

GDP=C + I + G + (X-M).

And here's what the formula actually stands for: GDP = private consumption (C) + gross investment (I) + government spending (G) + (exports – imports). A way to more easily remember this is…

Why is GDP deflator calculated? ›

GDP deflator, also known as the implicit price deflator, is used to measure inflation. It is used to determine the levels of prices of the new domestically produced final goods and services in a country in a year.

How to calculate GDP example? ›

GDP = consumption + investment + government spending + net exports. In this case, $200 million + 55 million + $120 million + $80 million + $45 million = $500 million. Then imports of $50 million is subtracted to get GDP = $450 million.

What is the formula for deflation? ›

The rate of deflation can be calculated like this: Look at the price index of the current year (CPIc) and the price index of the previous year (CPIp). Subtract the current year (CPIc) from the previous year (CPIp). Divide the result by the CPI from the previous period.

Why is GDP deflator called implicit? ›

The GDP deflator, also called implicit price deflator, is a measure of inflation. It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year.

What is the current value of the GDP deflator? ›

ActualPreviousDates
124.90125.301961 - 2024

What is GDP deflator with example? ›

A GDP deflator is a tool that is used to measure price changes over time, and it is also known as the GDP price deflator or implicit GDP price deflator. It measures the changes in prices for all the goods and services produced in an economy. It measures inflation (prices going up) and deflation (prices going down).

What is the GDP deflator rule? ›

GDP deflator = (Nominal GDP / Real GDP) * 100. Nominal GDP refers to the current prices in the market whereas Real GDP measures the actual cost that went into producing the product. Nominal GDP is calculated using that year's prices while Real GDP is calculated using the base years prices.

How to calculate real GDP? ›

It is expressed in base-year prices and is often referred to as constant-price, inflation-corrected, or constant-dollar GDP. Real GDP makes comparing GDP more meaningful because it shows comparisons for both the quantity and value of goods and services. Real GDP is calculated by dividing nominal GDP by a GDP deflator.

How to calculate GDP with GDP deflator? ›

Divide the nominal GDP by the GDP deflator and multiply by 100. This will give you the real GDP.

How is GDP calculated for dummies? ›

GDP can be calculated by adding up all of the money spent by consumers, businesses, and the government in a given period. It may also be calculated by adding up all of the money received by all the participants in the economy. In either case, the number is an estimate of "nominal GDP."

Is the GDP deflator a percentage? ›

GDP deflator is a measure of price level in an economy and is measured as a ratio of nominal to real GDP. This means that GDP deflator is calculated as nominal GDP divided by real GDP multiplied by 100.

What is the formula for GNP deflator? ›

GNP Deflator = Nominal GNP / Real GNP × 100

The percentage is usually expressed with three decimal places.

Is CPI the same as GDP deflator? ›

The CPI measures price changes in goods and services purchased out of pocket by urban consumers, whereas the GDP price index and implicit price deflator measure price changes in goods and services purchased by consumers, businesses, government, and foreigners, but not importers.

What is the current GDP deflator? ›

Basic Info. US GDP Implicit Price Deflator is at a current level of 124.21, up from 123.27 last quarter and up from 121.26 one year ago. This is a change of 0.76% from last quarter and 2.43% from one year ago.

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