# GDP deflator

## GDP Deflator (Overview, Formula) | How to Calculate GDP Deflator?

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’s a measure of price inflation/deflation with respect to the specific base year and is not a fixed basket of goods or services but is allowed to be modified on a yearly basis depending on consumption and investment patterns.

The GDP deflator of the base year is 100.

### Formula of GDP Deflator

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?

Here, we have used the following data for the calculation of this formula.

In the below template, we have calculated this Deflator for the year 2010 using the above-mentioned formula of GDP Deflator.

So, GDP Deflator calculation for the year 2010 will be –

Similarly, we have calculated the GDP Deflator for the year 2011 to 2015.

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Therefore, GDP Deflator calculation for all years will be –

It can be noticed that the deflator is decreasing in 2013 and 2014 compared to the base year of 2010. 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.

The GDP deflator can also be used to calculate the inflation levels with the below formula:

Inflation = (GDP of Current Year – GDP of Previous Year) / GDP of Previous Year

Extending the above example, we have calculated the inflation for 2011 and 2012.

Inflation for 2011

Inflation for 2011 = [(110.6 – 100)/100] = 10.6%

Inflation for 2012

Inflation for 2012 = [(115.6 – 110.6)/100] = 5%

The results highlight how the general price of all goods and services in the economy falls from 10.6% in 2011 to 5% in 2012.

### Importance

Though measures CPI (Consumer Price Index) or WPI (Wholesale Price Index) are existing, the GDP deflator is a broader concept due to:

• It reflects the prices of all domestically produced goods and services in the economy compared to CPI or WPI since they are a limited basket of goods and services thereby not representing the entire economy.
• It includes prices of investment goods, government services, and exports while excluding prices of imports. WPI, for instance, does not consider the service sector.
• Important changes in the consumption patterns or introduction of new goods or services are automatically reflected in the deflator.
• WPI or CPI is available on a monthly basis whereas deflator comes with a quarterly or yearly lag after GDP is released. Thus, monthly changes in inflation cannot be tracked which does impact its dynamic usefulness.

### Practical Example – GDP Deflator of India

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. A deflator above 100 is an indication of price levels being higher as compared to the base year (2012 in this case). It’s not necessary that inflation is occurring but one can experience deflation after a period of inflation if prices are higher compared to the base year.

• In the above graph, the base year was changed in 2012 to better reflect the economy as it would cover more sectors. Prior to that, the base year was 2004-05 which required to be changed.
• Since India is a rapidly growing economy with dynamic changes to its policy the mentioned changes were essential. Also, the increasing deflator reflects a steady increase in inflation due to continuous growth opportunities.
• As per World Bank Reports for 2017, India ranks 107 for the list of GDP Deflator with an inflation rate of 3%. This can be stated as a comfortable position compared to countries that may be facing hyperinflation such as South Sudan and Somalia. On the contrary, it also does not face the threat of deflation such as Aruba and Liechtenstein. Hence, it is important to keep it at manageable levels.
• The RBI has adopted the CPI as a nominal inflation anchor because, during 2016, the GDP Deflator suggested the country entering a deflation zone while CPI continuing to exhibit a moderately high inflation level. Such situations can push the economy into deflation with the implication being that corporate earnings and debt servicing ability which closely tracks Nominal GDP will keep on deteriorating while inflation-adjusted GDP (Real GDP) may continue to exhibit growth rate in excess of 7%.

### GDP Deflator vs CPI (Consumer Price Index)

Despite the presence of GDP Deflator, the CPI seems to be the preferred tool used by economies for ascertaining the impact of inflation in the country. Let us look at some of the critical differences between GDP Deflator vs CPI

 GDP Deflator CPI (Consumer Price Index) Reflect the price of all goods and services domestically produced Reflects the price of goods and services ultimately purchased by the final consumers It compares the price of existing produced goods and services against the price of the same goods and services in the base year. This makes the group of goods and services used for GDP computation change automatically over time. It compares the price of the fixed basket of goods and services to the price of a basket in the base year. It contains the prices of domestic goods Imported goods are also included in the same. 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. As most of oil/petroleum is imported from Western Asia, whenever the price of oil/petroleum product changes, it is reflected in CPI basket as petroleum products compute larger share within CPI. Another example can be of ISRO satellite which shall be reflected in the deflator. Assuming the price of ISRO increases, it would not be a part of CPI index as the country does not consume satellite. It assigns changing weights over time as a composition of GDP changes. Assigns fixed weights to prices of different goods. It’s computed using a fixed basket of goods.

This has been a guide to what is GDP Deflator. Here we discuss how to calculate GDP Deflator using its formula along with practical examples and its importance. We also discuss GDP Deflator vs CPI. You may learn more about economics from the following articles –

Источник: `https://www.wallstreetmojo.com/gdp-deflator/`

## GDP deflators: user guide

The GDP deflator can be viewed as a measure of general inflation in the domestic economy. Inflation can be described as a measure of price changes over time. The deflator is usually expressed in terms of an index, i.e. a time series of index numbers.

Percentage changes on the previous year are also shown. The GDP deflator reflects movements of hundreds of separate deflators for the individual expenditure components of GDP.

These components include expenditure on such items as bread, investment in computers, imports of aircraft, and exports of consultancy services.

### 1.2 Uses of the GDP deflator series

The series allows for the effects of changes in price (inflation) to be removed from a time series, i.e. it allows the change in the volume of goods and services to be measured. The resultant series can be used to express a given time series or data set in real terms, i.e. by removing price changes.

### 1.3 Where do the figures come from?

A series for the GDP deflator in index form is produced by the Treasury from data provided by the Office for National Statistics (ONS). Forecasts are produced by the Office for Budgetary Responsibility (OBR) and are usually updated around the time of major policy announcements, namely; the Chancellor’s Autumn Statement, and the Budget.

### 1.4 Rounding Convention

GDP deflators for earlier years (up to and including the most recent year for which full quarterly data have been published) are presented to 3 decimal places.

The index for future years has been removed as the forecasts were not as accurate as this detail would suggest.

Percentage year-on-year changes are given to two decimal places for earlier years, forecast years are presented to 1 decimal place as published in the Autumn Statement and the Budget.

• updates to earlier years (up to and including the most recent year for which full quarterly data have been published) shortly after the ONS Quarterly National Accounts release
• when the OBR updates its forecasts, shortly after the Budget and again after the Chancellor’s Autumn statement

### 2.1 What is GDP?

Gross Domestic Product (GDP) is a measure of the total domestic economic activity. It is the sum of all incomes earned by the production of goods and services within the UK economic territory.

It is worth noting that where the earner of the income resides is irrelevant, so long as the goods or services themselves are produced within the UK. GDP is equivalent to the value added to the economy by this activity.

Value added can be defined as income less intermediate costs (costs as a result of the production of the final goods or services). Therefore growth in GDP reflects both growth in the economy and price changes (inflation).

### The production approach

The production approach to GDP, known as GDP(P), is the sum of all production activity within an economy. In the form of an equation, this is described by:

• GDP(P) = output – intermediate consumption + taxes on products – subsidies on products
• output is all the goods and services produced, whilst intermediate consumption comprises all the goods and services consumed or transformed in a production process; the taxes and subsidies are included in order to put all three approaches on a consistent valuation basis

### The expenditure approach

The expenditure approach to GDP, or GDP(E), is the sum of all final expenditures within an economy. In equation form, this is as follows:

• GDP(E) = household final consumption expenditure + final consumption expenditure of non-profit institutions serving households (NPISHs) + general government final consumption expenditure + gross capital formation + exports – imports
• final consumption expenditure is expenditure on goods and services purchased for the last time and not to be consumed or transformed in a production process; gross capital formation comprises investment in fixed assets, changes in inventories and net acquisition of valuables
• exports and imports relate to trade in goods and services with the rest of the world and do not include other cross-border financial flows

### The income approach

The income approach to GDP, or GDP(I) is the sum of all factor incomes within an economy. This could also be described as the sum of incomes directly generated by productive activity. In equation form:

• GDP(I) = compensation of employees + gross operating surplus + mixed income + taxes on production and products – subsidies on production and products
• compensation of employees is all income from employment, including employers’ pension and social contributions; operating surplus is primarily made up of trading profits and rental income, whilst mixed income is the income of the self-employed

(The description of the 3 approaches above is taken from the ONS’ UK National Accounts 2012 release)

These 3 measures should, in reality, be equal as they are measuring the same flows of money. However in practice all 3 measures are complicated to measure and so may vary.

The Office for National Statistics (ONS) produces a single series by ‘balancing’ the 3 measures.

GDP figures are released quarterly along with other National Accounts data and are available from the ONS or in its publications such as UK Economic Accounts and the Blue Book.

### 2.3 Current and Constant Price GDP

GDP, many of the National Accounts aggregates, can be expressed in terms of either current or constant prices.

Current price figures measure value of transactions in the prices relating to the period being measured. Constant price figures express value using the average prices of a selected year, this year is known as the base year.

Constant price series can be used to show how the quantity or volume of goods has changed, and are often referred to as volume measures.

The ratio of the current and constant price series is therefore a measure of price movements, and this forms the basis for the GDP deflator.

### 2.4 ONS GDP series used to construct the GDP deflator

The GDP deflators are constructed from ONS single GDP series for current and constant prices (as explained above) on a seasonally adjusted basis. The ONS uses 4-character identifiers to label their series and these are YBHA and ABMI respectively.

These seasonally adjusted GDP series are used to calculate the GDP deflator (rather than the not seasonally adjusted GDP series for current and constant prices) because some components of the GDP series for constant prices are collected on an annual calendar year basis, and the quarterly series are then interpolated from that series, and the ONS advise that the seasonally adjusted quarterly GDP series for constant prices is the more reliable series for the purposes of calculating the GDP deflator.

The series shown for money GDP, in the separate table alongside the GDP deflator series, is the ONS single GDP series for current prices on a non seasonally adjusted basis. The ONS identifier for this series is BKTL. This series is collected on a quarterly basis and is the best series to use for the purposes of calculating public spending as a percentage of GDP.

### 2.5 The base year and the reference year

As of April 2013 the ONS uses 2009 as the base year for GDP (ie GDP at constant prices). This means that the individual components of GDP that are aggregated together are done so using the prices relating to 2009.

It is often helpful to change the reference year so that another point is referenced as 100. For the purposes of the GDP deflator series prices are shown relating to the last full financial year.

For further information on the reference year and index numbers see Annex A: How to use the GDP deflator series: Practical examples, changing the reference year.

### 2.6 The GDP deflator and other measures of inflation

The Consumer Prices Index (CPI) and the Retail Prices Index (RPI) are the two main measures of consumer inflation in the UK. The Producer Price Index (PPI) measures the price changes of goods bought and sold by UK manufacturers. The Services Producer Price Index (SPPI) measures the price changes of services provided by UK businesses to other businesses and government.

The GDP deflator is a much broader price index than the CPI, RPI (which only measure consumer prices), or PPI as it reflects the prices of all domestically produced goods and services in the economy.

Hence, the GDP deflator also includes the prices of investment goods, government services and exports, and excludes the price of UK imports.

The wider coverage of the GDP deflator makes it more appropriate for deflating public expenditure series.

### 3. Practical examples of how the deflator series can be used

We have put together an extract from a deflator series that provides examples of how the series can be used.

View the practical examples

Источник: `https://www.gov.uk/government/publications/gross-domestic-product-gdp-deflators-user-guide/gdp-deflators-user-guide`

## GDP Deflator Formula | Calculator (Examples With Excel Template)

• Formula
• Examples
• Calculator

### What is GDP Deflator Formula?

The term “GDP deflator” refers to the index that helps in determining price inflation or deflation in the economy. In other words, the GDP deflator is a measure of the general price level of all the goods and services being produced in an economy.

The formula for GDP deflator is very simple and it can be derived by dividing the nominal GDP by the real GDP and then the result is multiplied by 100.

Nominal GDP captures the valuation of all goods and services at current prices, while real GDP is the valuation of the same at constant prices without the effect of inflation. Mathematically, the formula for GDP deflator is represented as,

GDP Deflator = (Nominal GDP / Real GDP) * 100

Let’s take an example to understand the calculation of GDP Deflator in a better manner.

### GDP Deflator Formula – Example #1

Let us take a simple example of an economy where the nominal GDP (valued at current prices) is \$5.65 million and real GDP (valued at constant prices of the base year 2014) is \$4.50 million during the year 2019. Calculate the GDP deflator for the economy.

Solution:

GDP Deflator is calculated using the formula given below

GDP Deflator = (Nominal GDP / Real GDP) * 100

• GDP Deflator = \$5.65 million / \$4.50 million * 100
• GDP Deflator = 125.56

Therefore, the GDP deflator for the economy stood at 125.56 during the year 2019.

### GDP Deflator Formula – Example #2

Let us take the example of some random items, namely product X and product Y. The following information about the production quantity and prices of the products for the last three years is available where the year 2016 is to be treated as the base year. the given information, calculate the GDP deflator for the year 2016, 2017 and 2018.

Solution:

Nominal GDP is calculated using the formula given below

Nominal GDP = (Quantity of Product X * Price of Product X) + (Quantity of Product Y * Price of Product Y)

For 2016

• Nominal GDP = (100 * \$2.00) + (200 * \$1.00)
• Nominal GDP = \$400

For 2017

• Nominal GDP = (180 * \$3.00) + (250 * \$1.50)
• Nominal GDP = \$915

For 2018

• Nominal GDP = (250 * \$3.50) + (300 * \$2.50)
• Nominal GDP = \$1,625

Real GDP is calculated as

For 2016

• Real GDP = (100 * \$2.00) + (200 * \$1.00)
• Real GDP = \$400

For 2017

• Real GDP = (180 * \$2.00) + (250 * \$1.00)
• Real GDP = \$610

For 2018

• Real GDP = (250 * \$2.00) + (300 * \$1.00)
• Real GDP = \$800

GDP Deflator is calculated using the formula given below

GDP Deflator = (Nominal GDP / Real GDP) * 100

For 2016

• GDP Deflator = (\$400 / \$400) * 100
• GDP Deflator = 100

For 2017

• GDP Deflator = (\$915 / \$610) * 100
• GDP Deflator = 150

For 2018

• GDP Deflator = (\$1,625 / \$800) * 100
• GDP Deflator = 203.13

Therefore, the GDP deflator for the year 2016, 2017 and 2018 stood at 100, 150 and 203.13 respectively. This indicates that compared to 2016 the price level has increased by 50% in 2017 and 103.13% in 2018.

### Explanation

The formula for GDP deflator can be derived by using the following steps:

Step 1: Firstly, determine the nominal GDP of the subject economy. It is the product of all the goods and services produced in the economy and their respective current prices. The current price can either increase or decrease over a period of time- inflation or deflation in the economy respectively.

Step 2: Next, determine the real GDP of the economy and it is the product of all the goods and services produced in the economy and their respective constant prices. The constant price is the price in the base year which does not change due to inflation or deflation.

Step 3: Finally, the formula for GDP deflator can be calculated by dividing the nominal GDP (step 1) by the real GDP (step 2) and then the result is multiplied by 100 as shown below.

GDP Deflator = (Nominal GDP / Real GDP) * 100

### Relevance and Uses of GDP Deflator Formula

The concept of GDP deflator is a very important economic metric as it helps in capturing the changes in the price level in an economy by measuring all the factors of the GDP.

Although GDP deflator is similar to other price indices, Consumer Price Index (CPI) and Wholesale Price Index (WPI), the major difference between it and the other price indices is that it is not a fixed basket of goods and services.

The GDP deflator is determined on the basis of a dynamic basket that alters its composition the requirement of each case.

Further, the difference between GDP deflator and a price index is usually quite small. However, governments prefer utilizing price indexes over GDP deflator for fiscal and monetary planning because even the smallest of differences in inflation measure can alter the budget big time as they run into billions and trillions of dollars.

### GDP Deflator Formula Calculator

You can use the following GDP Deflator Calculator

GDP Deflator =
 Nominal GDP X 100 Real GDP