How to Calculate GDP Deflator

One of the most common measure of a country’s economy is its GDP (Gross Domestic Product), which is basically the market value of all final durable and non-durable goods and services produced within a country during a specified period of time.  It is an effective way of measuring the health of a country’s economy and is therefore of great interest to both the nation as well as the outside world. A high GDP indicates a healthy economy, which typically leads to high wages and low unemployment. Investors are also attracted to the country with a healthy economy.

There are a number of ways to look at a given economy’s GDP, one of which is to measure the level of prices of all new, domestically produced, final durable and non-durable goods and services. This is known as the GDP deflator, also known as the implicit price deflator for GDP. It gives you an insight into the selected GDP by making adjustments for inflation or deflation.

You do not need to be an economist to learn how to calculate GDP deflator.

Instructions

  • 1

    The first thing that you need to do to calculate GDP deflator is to determine the value of the Nominal GDP, which is basically the GDP that you want to compare. In order to calculate this value, you need to sum the quantities of all final goods and services purchased during a particular year after multiplying them by their respective prices in that year.

  • 2

    Next, you need to calculate Real GDP, which you will basically be using as a point of reference. To determine the Real GDP, you need to choose a base year and then use the pricing of different products and services in that year to determine the total sum of consumer expenditures on durable and non-durable goods and services, sum of expenditures on investments, sum of all government spending on goods and services and the difference between imports and exports for the year that you are calculating the Real GDP of.

  • 3

    After you have determined the values of both Nominal GDP and Real GDP, use the two values in the GDP deflator formula, which is “Nominal GDP divided by Real GDP multiplied by 100.”

  • 4

    The resulting value will be the GDP deflator value.

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