The GDP deflator is a price index that calculates the variation in the prices of an economy in a given period using the gross domestic product (GDP) .
The GDP deflator is used to know the part of the growth of an economy that is due to the price increase.
It is calculated in order to soften the increase in prices in an economy and, therefore, allows to correct the estimates of the growth of the economy, since if it is not used, the growth would not be real, since it could be overvalued. Generally, this corrective effect is applied to one of the most important variables to measure economic growth, which is called gross domestic product (GDP) , and is defined as the set of goods and services produced in an economy in a given period of Time, usually, one year.
How is the GDP deflator calculated?
The calculation formula for the GDP deflator is as follows:
GDP Deflator = (nominal GDP / real GDP) * 100
Nominal GDP reflects annual price changes, whether increases or decreases. However, real GDP eliminates price change over time. On the other hand, the deflator is a general indicator of inflation and deflation , being implicit because it measures changes in the composition of prices and GDP. It does not measure the quality of life of a country, and is more related as a factor of salary and financial adjustment or to calculate the purchasing power of a country. See difference between nominal and real.
Comparison with other price indicators
The GDP deflator has advantages and disadvantages.
Advantages of the GDP deflator
At the same time, when calculating inflation, the GDP deflator presents a series of advantages over the CPI (Consumer Price Index) :
- It takes into account all goods and services produced in a country.
- It counts the changes in the habits of purchase of each year. The shopping cart that makes up the CPI is not updated every year, which can lead to error.
Disadvantages of the GDP deflator
One of the criticisms of the GDP deflator is that it does not take into account the submerged economy and that the time for its calculation is longer than to calculate the CPI.