GDP deflator Flashcards
What does GDP deflator do
Reflects the prices of all domestically produces g/s in an economy
The GDP deflator considers
Both the nominal GDP and real GDP of an economy
What does nominal GDP rep
the value of the finished g/s than an economy has produced without considering inflation whereas the read GDP means the value of the finished g/s an economy has grown adjusted for inflation
Thus what is GDP deflator
a factor by which Nominal GDP is adjusted to calculate Real GDP. It changes GDP by removing the effect of rining prices (inflation)
If there were no inflation involved
Nominal GDP would = Real GDPW
What does GDP inflator calculate
the impact of inflation (average price level) on the final g/s relative to base yearG
GDP DEFLATOR=
(nominal gdp/real gdp) x 100
The GDP deflator base year =
100
inflation —> GDP deflator =
more than base yr eg. 110
deflation —-> GDP deflator =
less than base year prices eg. 90%
Nominal GDP =
GDP evaluated using current market price
Real GDP =
GDP evaluated using base yr price
Retail price index (RDI)
A measure of inflation which is the ratio at which prices of g/s are rising. It is the measure of avg price level relative to base yr
eg. A RPI of 115% implies that prices have increased by 15%
Real GDP is a better
Indicator of econ activity as it is a measure of the increase in qty/vol of g/s produces. This is because prices are held constant and any changes in GDP is due to the change in qty of g/s
An increase in real GDP =
a higher standard of living i.e people can afford more g/s
