All the countries of the world are concerned with evaluating their economic growth, which is why the value of the goods and / or services produced in their economy is so important. The obstacle to this measurement is the distortion generated by the variation (increase or decrease) of prices and the way in which this affects the value of what is produced.
The deflator of Gross Domestic Product It is an index used to measure prices and their variation in an economy for a specified period (generally one year), using GDP (GDP) for this. It is used to detail the growth of an economy due to price increases.
Advertisements
That is, the GDP deflator is indicated by the quotient associated with the variations of the Gross domestic product at current prices also at constant prices. Economically with this, the variation in prices of all good and / or service generated by the economy of a country is measured, regardless of the economic destination of those goods (investment, final consumption or export), excluding goods imported.
It does not measure price levels and should not be considered an index of quality of life.
Advertisements
In this article you will find:
What is it used for?
This measure is used in the search to correct the economic problems related to the overestimation of some economic magnitudes. Specifically, it is used to eliminate inflation as a price variation factor, to obtain a real measure of national production.
Advertisements
Allows you to evaluate the economic growth and make comparisons with other economies through their GDP.
It also makes it possible to measure the evolution of prices, more specifically than other price indicators that only consider some specific goods.
Advertisements
How is it calculated?
The GDP deflator It is a fairly precise measure, since in its calculation it is refined and includes only the goods or production final, eliminating duplications generated by intermediate products that are used as inputs or raw material in the production of other goods.
Its calculation is very simple, since generally there is information regarding the Gross Domestic Product at current and constant prices.
Advertisements
For this, the following equation is used:
GDP deflator = (Nominal GDP / Real GDP) x 100
Like the CPI (consumer price index), it constitutes a price measure, due to the inflation/deflation relative to a base year.
The GDP deflator changes depending on the economic investment of the country and the consumption patterns of said goods.
Considerations when using the PIB baffle
- Nominal GDP: Reflects annual price increases or decreases. Measures current monetary value.
- Real GDP: Excludes price variations over time. It measures the value of production at constant prices.
- GDP Deflator: It is an indicator of inflation and deflation. Measures changes in the disposition of prices and GDP. Present as a factor for salary and financial adjustment.
Importance
The importance of the GDP deflator index resides in the use provided to such information, since it is related to important issues such as; salary adjustments, economic growth, financial environment, purchasing power, behavior of the economy, etc.
Advantages offered by the GDP deflator
When calculating inflation, the GDP deflator it has certain advantages over other indicators.
- It takes into account all the goods and / or services that are produced in a country.
- It records the variations that have occurred in purchasing habits year after year.
Disadvantages of the GDP deflator
The main criticism received by the GDP deflator is for not taking into account the underground economy. On the other hand, the time to calculate the deflator may be longer than the time required to calculate, for example, the CPI.
